As we have explored over the past few months, implementing an employed salesforce strategy is not just about putting sales people on the street. You have to make careful decisions and calculated moves. One of the most important decisions is how you plan on compensating your sales-force. There are many methods of paying
employees:
- Commission Only
- Bridge draw for a few months then commission only
- Salary and evergreen (forever) commission
- Salary and limited term commission
- Salary and signing bonus
- ...and numerous permutations of all of these.
Other payable events such as activation bonuses, accelerators and production incentives need to be reviewed. In addition, how will the salespeople be compensated for auxiliary services, products and even terminal sales? Let’s not forget the cost of benefits and taxes that must also go into your analysis. Oh, by the way, we are not working on an unlimited budget so we need to understand what our budget is for this new channel. If we spend too much we will have other problems. There is nothing easy about putting together a compensation plan. It can be a complex formula of many moving parts.
One of the first things an acquirer must do is understand his target market. Selling to mom and pop merchants requires different skills than selling to national accounts or complex business types. As a general rule, the more complex a business, the longer the sales cycle will be and the more important it will be to provide a base salary to the sales professional. A salesperson will need this base compensation to pay their bills until the sale can be made. However, they will generally receive a lower variable commission since they receive a base salary. There is a new trend today to pay base salaries to mom and pop salespeople as well. Many acquirers have been successful with this strategy because they can pay a lower commission (or non-evergreen) when a base salary is being paid. Over the long-haul, this can create tremendous value to an acquirer because the revenues derived from the merchant will not need to be shared to a great extent with the salesperson. This is often achieved by paying residuals for a limited time or only paying activation bonuses. However, paying numerous reps a base salary can be quite costly and you can burn through a lot of cash if you have under performing salespeople.
Knowing your budget is a key element to crafting a compensation plan. If you need to put 20 salespeople on the street but only have limited capital to utilize, you will probably gear towards a greater percentage of the compensation being commission. These “eat what you kill” sales representatives will still have costs relating to travel, taxes and benefits, but you will minimize your upfront costs. This model has traditionally worked well in the mom and pop merchant markets where there is a short sales cycle and generally greater turn- over in the sales ranks. Providing an “employee” model to these representatives can allow you to stand-out from the independent contractor models. Today, many organizations are even offering fixed base salaries or draws for salespeople during the first few months until they get their pipeline full. If you have a larger budget, you may want to consider a higher base compensation with no residuals or limited (in time or amount) residuals. This type of program obviously carries a higher fixed-cost but over the long-haul can prove to be quite profitable as the acquirer keeps the majority of the payment stream. Whatever the model, make sure you know your budget and don’t forget about accounting for taxes, travel and benefits. These are real costs and must be put into the model.
As we talk about “the model,” I always recommend modeling conservatively. Never model after your best or even your average salesperson. I recommend modeling based on half your reps being poor performers. This allows you to experience a win if performance metrics turn out to be better than fifty percent. Likewise, I would stay away from implementing any model that does not show a break-even within eighteen months. To do this you have to truly understand your merchant make-up and profitability (something that should be monitored monthly). Stretching break-even out past eighteen months is a scary proposition because of the volatility of our business.
The last point I will make on compensation plans is that simple is always better than complicated. If the salesperson doesn’t understand the plan, they will never trust the organization and you will find that you get caught-up in re-explaining it every time commissions are paid. A complicated plan can also have other unforeseen issues. It can increase the turn-over of the sales- force. Keep it simple for both you and the sales-force. The only complexity I would add would be in the form of accelerators or performance bonuses. These bonuses truly incent and motivate the top performers. Pay your best reps a lot … a whole lot. At the same time, though, minimize your exposure on your underperformers. A plan that is simple and pays your top salespeople a lot and your weak salespeople a little will cost you that same as one that compensates everyone equally. Oh, and if you end up with all top performers and pay out more, think of all the money you will save in training costs.
There is no magic formula, but if you keep these seven principals in mind when you work your model (see April 2006 article) you will be well positioned:
- Know your target merchant
- Understand how much you have to spend on salaries
- Assume 50% of your reps will be under-performers
- Keep breakeven under 18 months (12 months if you are a smaller acquirer without deep pockets)
- Incent your high performers well
- Minimize your exposure on underperformers
- KISS (Keep It Simple, Stupid)
Every acquirer compensates his sales- force a little differently.
Feel free to tweak and adjust your model as you learn what works (and doesn’t work) over time. But communicate your “tweaks” to the sales- force and do not try and make major changes all at once. Salespeople don’t like big surprises. Over time, you should find a model that incents proper behaviour, keeps the sales-force happy, and delivers the appropriate ROI for the organization.
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