The right sales compensation plan is critical to your first hire with a new or growing business. Some of the considerations and challenges raised in this example are particularly relevant to business owners or directors who have come from a non-sales background who might be unsure where to start.
A fast growing leading Melbourne full service marketing agency was recently looking to hire their first salesperson to join their successful team, and shift their focus for active sales growth.
Prior to this new sales focus, sales activity was led by one of the Directors and other sales responsibilities were shared between the Digital Strategist and the Project Management team.
To some extent this hindered their ability to service existing clients and also build a new business funnel with a targeted focus for growth. In earlier days, this marketing agency has historically had more transactional business and strong referral leads than focusing on generating ongoing retainer engagements and developing new business sales capability.
Growing a sales team: Making your first sales hire
The marketing agency had decided, after an initial interview and shortlisting process, to hire a Senior Business Development Manager with general market rates and to provide an offer.
The initial challenge was how to pay them a suitable commission package in line with the direction of agency’s services and business growth plans.
Initially a flat fixed percentage plan was discuss on a high base salary. However, management were initially unaware of the many factors that needed to be considered in sales performance management. A clear aim wasto actively grow the number of new sales opportunities and through certain preferred service lines.
4 sales compensation considerations
This agency is in the process of shifting to a higher value retainer model from transactional project based or time based work. This needs to be considered in how sales plans and commission structure are determined and set.
- Sales goals for the financial year
- Services priority – retainer-based, projects and renewals
- Cashflow and encouragement of team based culture
- Not having an open ended commission plan initially, until aligned with business and financial objectives.
Proposed client solution
The agency’s initial view was to offer a flat rate percentage commission.
Upon review and with additional market insights, that suggestion didn’t quite make sense given the focus of revenue and profit required in the business to make this successful for both short term with the sales person, and also for establishing a foundation for business growth. The other consideration was to create the ability to scale the sales team in the future beyond Year 1.
When you are looking at sales compensation structures you need to look at the sales function of either retention focus (account management) or acquisition focus (business development) as both of these have an intrinsic mode of sales behaviour and associated type of sales approach.
From a sales structure typically the behaviour of your sales team is based on the incentive you set them. If you are a products or transactional business then sometime this top heavy loading on revenue on order might work from metrics focused on volume and size of revenue.
In the professional services area, this principle doesn’t apply and a delicate balance needs to be achieved between blending in gross profit margins for healthy financial considerations, a realistic and achievable individual target (particularly for a growth focused SMB/SME), the balance of acquisition and delivery capabilities, and the consideration of which types of services are best placed to sell during the customer buying lifecycle.
Different compensation plans need to be considered for acquisition mode sales and also retention sales plans, or perhaps a hybrid if the sales resource is responsible for both.
Being a full service marketing agency, most of the business’ client work is project based, and in recognising this, there was a discussion about the risk of setting targets too low – if the Senior BDM were to overachieve easily based on revenue early in the year, then there is always a risk that little motivation and monetary incentive exist for the remainder of the year. This can greatly degrade the productivity of the sales function if rewards for consistent performance aren’t put into place.
Our Sales ROI review highlighted that by aligning the sales strategy, a split commission element needed to be put into place, based on the expected contract renewals focus whilst helping the project team with securing the additional business, cross selling and up-selling.
Aligning the sales targets in line with a tightly linked compensation plan needed to be formulated realistically with the considerations in mind.
We provided some sales based guidance around reverse engineering their sales revenue target and direction of sales and marketing activity required to hit their sales goals for the next financial year.
The process of determining a break-even ROI on a sales hire is important as they will typically (depending on the industry) generate about three times the sales pipeline value of their individual sales target.
The challenge of ramp-up time and a comprehensive onboarding process is often not considered, with unrealistic expectations on the sales representative to successfully close business within their first month to justify their hire.
We provided a compensation calculation based on the right behaviour in line with the suite of services to be sold based on setting the right targets and appropriate commission elements to suit the individual’s needs and agency’s business focus.
Recommendations and Outcome
After sending through a compiled market survey from leading recruitment reports to validate market rates, the appropriate sales commission plan needed to be structured correctly and fairly to meet short term and longer term sales goals and a foundation which can scale.
For sales representatives, typically a base salary component and a OTE (On Target Earnings) is provided based on their sales target.
For Year 1 there was more importance on setting up the foundation, then progressing to Year 2 when the commission plan could be reviewed based on performance in Year 1.
After consideration and analysis of the business’ services and financial plan, our proposed plan consisted of:
A commission plan tied into three elements:
- Revenue for all project and services (Total Contract Value)
- Retainer Profit (Gross Profit)
- Team component for new business renewal and contribution (End of FY Team Bonus)
This equals the Year 1 target to hit their new business sales goal.
The structure for Year 2 can be negotiated depending on initial performance and tracking of realistic achievements, as well as a review from Year 1 to determine the success or challenges faced with this method.
Key takeaways and summary
For SMEs unfamiliar with how to compensate experienced sales people, I would suggest to not just think or assume that the simple plan or flat rate or % commission is sufficient, particularly in small business where cashflow is tight and profit margins are slim. You need to know your market and territory to assign as well as which market segment you are trying to sell into.
If you aren’t diligent in this approach to paying to a sales commission plan and target setting, whether it’s a junior or senior hire, you could risk exposure to overpaying your individual sales resource. A secondary effect is further reducing profit margins to keep them sufficiently motivated if they can achieve their sales target too quickly and easily.
In highlighting this, it is critical to understand where you are paying commissions from, are this cost built into your service contract and deal, or overall based on your gross profit margins. Your ability to scale and grow your sales teams requires some analysis on where your ROI can be generated from.
You need to know your business figures thoroughly, such as individual overheads and sunk costs, and impacts on GST and superannuation payments. Fundamentally you need to know your financial forecast of revenue and profit margins first to determine whether you can onboard the right investment in sales headcount and budget to start with.
The other tip is to ensure that you mutually review the goals regularly and separate commission plans with performance reviews to ensure your growth plans are in line with business needs.
As you grow the sales function within your team and business, building that consistent foundation is recommended with the right sales performance advisor until you are ready to hire a sales manager. Consider the temporary impact of sales resource turnover or ongoing challenges to grow future sales hires.
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