Sales commission structures that drive growth
Here’s a common issue lately: CEOs contact us because they fear that they don’t have the right incentives in place for growth. Some tell us that their sales people have built a nice book of customers, and are busy managing that base. Their sales people are content with their compensation, so they spend very little time doing the hard work necessary to bring in new business. Or we’ll hear the flip side: The sales force is so focused on getting new business that there’s an alarming rate of attrition among the existing clients because no one is paying proper attention to them.
The CEO may ask us, “Should I cut off commissions on current clients? Do I need to divide my sales team into those who prospect for new business and those who grow existing business?”
We call this the hunter/farmer compensation dilemma. It can be a really tough issue and there is no textbook answer. It comes down to what your business needs. We recommend starting by defining where you want growth to come from, then assessing the strengths of your sales team and your support or customer service team to see how they fit that strategy. Are you set up with a good transition between the two?
Here are some more specific questions to ask yourself:
- What do you need your sales team to do most to drive growth? It may be that you want your sales rep to stay in accounts so they can get more out of existing relationships: selling additional products/services, selling to additional departments/locations. Or perhaps they should be passing those relationships on to a support team so that they can do more prospecting. Maybe you need a blend of both.
- How well can your sales team manage accounts? One common scenario is having sales people who are experts at getting new business sign the deals. Once the deal is signed, the relationship is then handed off to a customer service or account management person who may not be focused or skilled on digging to find new opportunities with that client. They may be managing the day-to-day business well, but that person is not really selling. How are you going to hang onto those relationships and grow those accounts?
- Who maintains the senior relationships? Whatever product or service you sell, you tend to have your middle-level people working on the day-to-day account service with the client’s middle-level people. But chances are good that your sales person initially sold to senior-level people. Who maintains those relationships? What happens when a new senior-level person comes in? Who will be responsible for the executive touch?
Alternatives for structuring your incentive compensation plan
Depending on your answers to the three questions above, there are different types of pay systems to support your sales efforts. Remember that compensation drives behavior. If I were to read your plan, I should easily see what you want me to do.
- You want to drive growth through new business. Your compensation plan should have significantly higher percentage commissions for bringing in a new client. This is the Hunter model and assumes that you have capable people to whom you can transition accounts.
- You want to drive growth through current accounts. In this scenario, you should compensate reps for a percentage increase from their account base. This is what some call the Farmer model. Reps can grow their business by looking for additional opportunities within current deals, look for additional locations, departments, initiatives, etc. Commissions are actually paid on year-over-year growth, not just revenue.
- You want your sales people to be hunter-farmer hybrids. This is a fairly common model with smaller sales teams who can’t afford to have separate Hunter and Farmer roles. Even within this model, you may decide to tip the scales one way or another by awarding increased commissions toward your preferred growth model. For instance, this may include paying a bigger percentage on new business, with a smaller percentage available for maintaining existing accounts. I suggest a 3-1 commission ratio on new vs. current. That way if something goes wrong and you need a quality check on your customer service team, or if there is a change in the key relationships and you need someone to go back in and build rapport, that sales rep is still getting paid to pay attention to the account. But the bulk of their money is coming from bringing in new business.
- You want growth, and the sources don’t matter. This is the most popular in the earlier stages of company growth when acquiring any business is good business. In this scenario, your sales team makes commissions based on year-over-year numbers. It doesn’t matter if that growth came from new or existing clients. Your sales team can’t just sit on their accounts and continue to do the same thing. You’re leaving it up to each rep to decide the best way to grow the business and their income.
Here’s how we helped one company handle this sensitive issue. The company had some of the best sales people we’d ever seen. But none of them were hunting for new business. They were all making really good money managing their existing accounts. Certainly what they were doing was easier than getting on the phone and convincing someone new to buy.
On our advice, the company changed the compensation plan to pay significantly more for new business and for year-over-year growth. It was no longer okay just to get the existing business back for another year. The sales people had to go find new business and grow it. Now when they bring in new clients, they also bring in a lot more money for themselves.
It’s only been six months but the company is already growing. They lost a couple of good sales people over the change, but the new people brought in under this plan are doing well because they understood the game when they came in. While it’s still early, everyone appears to be happy with the new plan.
The bottom line
The hunter/farmer compensation dilemma is a common issue in any growing business. There are a lot of ways to structure a compensation plan. Whatever you decide to do, make sure that the plan clearly aligns with the actions/results that are most important to your business.
I would love to hear from you on how you’ve managed this issue!