Do We Have Sales Compensation All Wrong?

Posted by Dave Kurlan on Wed, May 06, 2015 @ 06:05 AM

balanced-compensation.jpg 

Earlier this week, I posted an article that explored whether or not a salesperson should be punished for landing a big deal if that same salesperson had nothing else in the pipeline.  It generated some heated discussion in the comments section and since there was disagreement about compensation in the comment section, I thought it would be helpful to discuss that.  Should a salesperson receive the maximum commission on the big deal if there was no other activity, critical KPI's weren't met, and the pipeline is essentially empty?

I believe the question merits more than a simple yes or no answer.

The negative comments appeared not only on my Blog, but also in the various LinkedIn Groups where the article was shared. One commenter said that we can't reward effort OVER results while another commenter said that we can't reward results to the exclusion of effort.  Both have their pros and cons, but is there a happy medium?

Let's suppose that our company expects each of its salespeople to generate $2 million annually, or $500K each quarter.  The sales cycle is 8 months, the average sale is $50,000, the closing percentage is 30%, and one quarter is already in the books.  The company has 5 salespeople and their quarterly performance was as follows:

Salesperson

# of Opps 
in Pipline

Value of Opps 
in Pipeline

Revenue YTD

Qualified 
Proposals

 Overall
Results

Overall 
Performance

1

0

$              0

$500,000

0

  On Target

 Poor

2

27

$ 1,850,000

$385,000

6

  Below Target

 Good

3

16

$    800,000

$520,000

3

  On Target

 Excellent

4

6

$    300,000

$250,000

2

  Under Target

 Poor

5

30

$ 1,500,000

$550,000

4

  Above Target

 Excellent

 

One commenter said the only thing he cared about was the results. He was referring to the big deal that salesperson #1 landed in the first quarter.  He wanted to celebrate this deal and this salesperson, but when you see the overall performance in black and white, it's clear that with an 8 month sales cycle and one quarter in the books, salesperson #1 will have annual sales of only $500,000 - the same number achieved for the first quarter.

Salesperson #3 is on target, but with a 30% closing ratio, there is not enough in #3's pipeline to support more than $240,000 in additional revenue.

# 5 will be fine, but #4 is currently failing and the rest of #4's year will likely be horrible.  

The interesting example is #2, who is below target, but has the healthiest pipeline, the greatest number of qualified proposals and will likely lead the sales force in revenue for the year.

Now let's factor in compensation.  If #1 maximizes his possible compensation by hitting his quarterly number, and then bombs the rest of the year, he will have been overpaid for his first quarter contribution to revenue.  If #2 is paid on the lowest possible scale for missing first quarter quota, she will have been underpaid for her first quarter contribution to revenue.

Those two salespeople and their first quarter performance make a great case for a compensation plan that factors results as well as quality effort (# of new opportunities/value of opportunities).  Results should still be weighed more heavily than effort, but if we include both, then both salespeople would be paid more in line with their overall performance.

If sales is worth 75% and effort is worth 25%, how would that affect compensation for these two salespeople on a bonus plan that pays out a maximum of 10% of revenue?

Salesperson #1 would be paid 75% of the maximum $50,000 (on $500,000 quota), or $37,500 for revenue and $0 for effort.

Salesperson #2 would be paid 25% of the maximum $50,000, or $12,500 for effort and 75% for revenue, or $28,500, for a total of $41,000.  Despite sales that were $115,000 short of quota, salesperson #2 would earn $3,500 more than salesperson #1 for adding 27 opportunities worth $1,850,000 to the pipeline.

I'm sure this will cause many to chime in with their own versions and variations and that would be awesome!  And based on what we read from commenters in the earlier article, I'm sure others will criticize the concept and they are more than welcome to do so.

I'm simply suggesting that we can get more from our salespeople if we factor more into the compensation plan than results.

Let's get as much feedback as possible. Have a comment?  Want to read what others think?  Either way, please use the buttons at the top of the article to share it on LinkedIn and Twitter to reach a wider audience for their thoughts.

Topics: Dave Kurlan, sales pipeline, sales performance, Compensation

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Best-Selling Author, Keynote Speaker and Sales Thought Leader.  Dave Kurlan's Understanding the Sales Force Blog earned a medal for the Top Sales & Marketing Blog award for six consecutive years. This article earned a Bronze Medal for Top Sales Blog post in 2016, this one earned a Silver medal for 2017, and this article earned Silver for 2018. Read more about Dave.

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