Many CEOs fear that they don’t have the right incentives in place for growth. There are two scenarios we often see; A) the salespeople have built a nice book of customers and are busy managing that base. Their salespeople are content with their compensation, so they spend very little time doing the hard work necessary to bring in new business. Or B) The salesforce 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. Here is how to create a commission structure that will drive growth.
According to Tiny Pulse, “43% of workers would be willing to leave their companies for a 10% salary increase.” That explains why having the right commission structure is important.
CEOs may wonder, “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 an existing business? This is known as a 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.
Start by defining where you want growth to come from, then assess the strengths of your sales and support or customer service teams to see how they fit within that strategy.
Are you set up with a good transition between your sales team and your growth strategy? Here are some clarifying questions to ask yourself:
It may be that you want your salesperson 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 to a support team so that they can do more prospecting. Maybe you need a blend of both.
One common scenario is having salespeople who are experts at getting new business secure deals. Once the deal is signed, the relationship is then handed off to a customer service or account management role, who may not be focused or skilled in digging to find new opportunities within a 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?
Whatever product or service you sell, tendencies are 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 salesperson 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?
Depending on your answers to the questions above, there are different types of pay systems to support your sales efforts. Remember that compensation sets the direction to drive behavior. If I were to read your compensation plan, I should easily see what your salespeople are supposed to do.
If bringing in new business is important, your compensation structure should have significantly higher percentage commissions for bringing in a new customer. This is the hunter model and assumes that you have capable people to whom you can transition accounts.
In this scenario, you should compensate salespeople for a percentage increase from their account base. This is what some call the Farmer model. Salespeople can grow their business by looking for additional opportunities within current deals, such as additional locations, departments, initiatives, etc. Commissions are actually paid on year-over-year growth, not just revenue.
This is a fairly common model with smaller sales teams who do not have separate Hunter and Farmer roles. Within this model, you may decide to tip the scales one way or another by awarding increased commission towards 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. A three-to-one commission ratio on new vs. current is a good start. 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 salesperson is still getting paid to pay attention to the account. But the bulk of their money is coming from bringing in new business.
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 Pivotal Advisors helped one company handle this sensitive issue. The company had some of the best salespeople 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.
Pivotal Advisors suggested that the company change 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 salespeople 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.
After only six months the company was already growing. They lost a couple of good salespeople over the change, but the new people brought in under this commission structure did well because they understood the game when they came in.
The hunter/farmer compensation dilemma is a common issue in any growing business. There are a lot of ways to build a commission structure. Whatever you decide to do, make sure that the plan clearly aligns with the actions and results that are most important to your business. So, ask yourself when was the last time you analyzed your compensation plan?
If you need help with your commission structure reach out to us at info@pivotaladvisors.com.
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