Incentivizing sales people

[saltybit]

I was talking to a friend who runs a B2B software company today, and he mentioned that last year, he changed the compensation scheme for his salespeople from a mostly commission-basis to a fixed salary scheme, because the sales people were not necessarily thinking about the long-term relationship with the customer and were saying (almost) anything that the customer wanted to hear just to get them to sign on the dotted line.

Since the change, sales had gone down, so he is thinking of changing the scheme again.

 

I personally have my own opinions, but I was curious since the members of this board have reviewed many companies, if they have come across examples of effective/innovative ways of compensating sales people.

Thanks!

[Viking]

Tricky question. A couple of very good rules of thumb are

1. Incentive pay should only be tied to what they have control over. This is critical as it can be very demoralizing to have incentive pay tied to factors outside of ones control (like total company results).

2. Percent of total compensation should be tied to type of business; a company like Kraft foods may have 15% of total compensation as incentive pay as sales function is more maintenance driven.

 

One of the challenges is a salesperson can do a lot of unethical things and look like a star for a year or even two. However, the truth inevitably comes out. The key is to have an incentive system (perhaps staggered, multiyear awards) that addresses these issues if they are widespread.

 

Perhaps the salesperson gets a certain amount at sign up, another amount after 12 months and a final payout after 24 months. Could be a bitch to track. Good luck.

 

 

[yadayada]

you can partially give them a bonus when they sign up, and another part giving them stock options in the company that they can exercise in 3 years or so.  This way they might also keep each other in check. This seems like it would breed a culture of longer term value.

[bookie71]

One way might be to have the commission based on longer term relationship with customer.  For example 30% at start 20% after one year, etc. Put emphasis on retention and satisfaction.  One company bases bonuses on satisfaction of customer in surveys.

[saltybit]

Thanks for the good suggestions. Tying compensation with longer-term metrics like customer retention and lifetime value make sense.

He was worried that he won't be able to attract enough salespeople with this kind of compensation scheme, but I told him, at least the people who end up joining will be more aligned with the company's interests. =)

 

[biaggio]

http://www.bakadesuyo.com/2014/04/how-to-motivate-people/

 

Thought this was good.

[SpecOps]

How does the business work? is it a recurring revenue stream or one off sales?

 

If the former you could scale and increase commissions on repeat business compared to new business, which encourages good relationships while sticking to the commission model which encourages sales.

 

Or part of their pay could also be based on customer satisfaction which would need to be measured some way

 

 

[Guest hellsten]

I think this book review that was posted by Kraven in another thread might have some answers:

As the global economy deteriorated, AB InBev offered 39 senior executives $1 billion worth of stock options, but only if they could cut the company’s debt in half by 2013. The managers responded by hitting the target two years early and AB InBev’s stock responded by rising nearly four-fold over that period.

 

AB InBev spread the options payout between 2014 and 2019 to encourage the newly rich managers to think long-term and keep their own capital in the business. This approach rewarded the managers, but kept them from being distracted with their new wealth – echoing the lesson they learned from Goldman and first applied in their Garantia partnership.

 

https://www.santangelsreview.com/2014/04/28/book-review-and-lessons-from-dream-big-a-glimpse-inside-the-strategies-and-tactics-of-3g-capital/

 

Original thread:

http://www.cornerofberkshireandfairfax.ca/forum/berkshire-hathaway/berkshire-acquires-heinz-for-72-5-ps/msg170114/#msg170114

 

Firing 10% every year might also work well ;D