MBA Mondays - Business 101 for startups by Fred Wilson

Economics & Finance: Commission Plans

Last week's MBA Mondays post about Bookings, Revenues and Collections generated a number of comments and questions about sales commission plans. So I decided to ask my friend Jim Keenan and AVC community member to write a guest post on the topic. Jim's blog, A Sales Guy, is a great read for those who want to get into the mind of a sales leader. So with that intro, here are Jim's high level thoughts on setting up commission plans. I know the discussion on this post is going to be a good one. So make sure to click on the comments link and if you are so inclined, please let us know what you think on this topic.

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I get asked a lot how to build a good commission plan. I give the same answer every time. Keep it simple and align it with company goals.

It amazes me how often companies screw this up.

Sales people are coin operated. Tell them they get a buck if they go get a rock, you'll get a rock, a whole lot of rocks. Tell them they get two bucks for red rocks, you'll get a lot of red rocks, but fewer rocks in general.

Sales people don't hear what you say; they hear what you pay!

Commission plans need to do two things; motivate sales people and sell product. They should align what you say, with what you pay.

The killer commission plan starts with two critical questions;

1) What do you want to sell?
2) How do you want the sales team to behave?

Commission plans drive behavior, get it wrong or don't align commission incentives with the company's goals you'll get everything you don't want and little of what you do want.

What do you want to sell? Do you want to sell your existing products or your new products? Do you want to sell your services or your software? Do you want more revenue or higher margin? Answering these questions up front matters. Whatever you put in your commission plan you WILL get. Build your plan for what you want to sell.

How do you want the team to behave? Do you want new accounts and new business or more business from existing accounts? If you want new accounts pay for hunting, if you want them to work the accounts you already have, then pay for farming. What ever you pay for you WILL get. Build your plan for how you want the team to act.

The key is to sit down with finance, product and marketing with the budget in hand and ask the questions; what do we need to sell by the end of the year? Where do we need the business to be? How much revenue do we need? How much margin do we want? How many new customers do we need? How much growth are we looking for? How do we define success at the end of the year? Once these questions are answered, incent the sales team to do exactly that. What ever you pay for you will get.

Once the incentives have been nailed and properly aligned, make the plan dead, stupid, simple. Don't overcomplicate it. Don't try to be sophisticated, creating fancy algorithms and fancy spreadsheets filled with if/thens. Make the plan "simple stupid."

A plan is simple stupid if a sales person knows exactly what they will be paid on a deal without looking it up. Simple plans motivate sales teams. They know what their deals are worth and chase them accordingly.

Complicated plans de-motivate. When sales doesn't know how much they will get paid on a deal, motivation is nipped. Make sure it's easy for sales to figure out what they get paid on a deal by deal basis.

In addition to being dead, stupid, simple, all plans must have accelerators. Don't be greedy. Don't look to cap sales earnings. If they are selling more, pay them more. Accelerators are when more commission is paid for a deal after a certain threshold is met, usually quota.

Finally, AND most important, once the plan is done DON'T MESS WITH IT. Nothing is more detrimental to a sales environment than changing the commission plan on the fly. You have to live with what you have.

Commission plans are the lifeblood of a sales team. Get them right; start counting the money. Get them wrong; it'll be a long year.

Remember; Sales people don't hear what you say, they hear what you pay . . . so pay right.

From the Comments

andyswan added:

Great post.

Would add one thing: EMBRACE the idea of salespeople making more than you do!

You would not believe how many times I've seen a CEO or founder decide he needed to "adjust" the commission structure because his top salesperson was making more than him.

Pure idiocy and ego. I always react the same "What, you want him to get LESS sales?" But it does happen, a lot.

Align incentives and hope that a LOT of people get very rich from your business. Remember, Hyman Roth.