Mark Donnolo is managing partner of SalesGlobe.
Companies that have long sales cycles often use leading indicators to pay those sales reps – after all, they’re working long hard hours but the revenue might not come in for a year or more. Leading indicators can work very effectively when the standards are clear – a design win, for example – but what if your industry lacks clear indicators?
Members of the SalesGlobe Forum met recently to discuss this performance measure potential quagmire.
SGF Member: Can you consider the pipeline a leading indicator?
MARK DONNOLO: I know a couple firms in particular in professional services – very large professional services firms – that will actually pay their business developers on the pipeline, which is actually kind of hard to believe. It’s very, very unusual. Now, I’ll say it’s a combination of partners and sellers and these people are highly trusted. If there’s a violation of that trust that person’s probably not going to be around for another year. So there’s a code of conduct. In a lot of sales organizations you can’t do that. I wouldn’t recommend that at home. But potentially, with leading indicators, you could go that far.
SGF Member: If you use a leading indicator – like a contract signed, for example – we’ll do something like that for a long sales cycle. We’ll pay an upfront bonus based on the potential value of that. But that merchant has to be boarded already so we have a chance to make some revenue.
But we also have a policy that says, if we don’t earn the revenue the rep says we’re going to earn according to the sales contract we have the right to take it back from a person. That can get a little risky, I think, because it’s sort of like a de-motivator, right? That’s tricky, when you get a year down the road and you say, “Oh well, we didn’t earn this revenue so we’re now in a
position to take money back from you.” That’s tough. But I don’t know of any better way.
SGF Member 2: But it’s better than waiting until the money came in.
SGF Member 3: We do the same thing, paying people on bookings rather than billings.
SGF Member 4: Sometimes it’s how you position it. We position it as advance.
SGF Member 5: We did it as a recoverable draw.
SGF Member: Do they have to earn it back?
SGF Member 5: Yes. We paid them at the beginning of the month. They had a draw, based on two measures: revenue and margin. And it was typically between six and eight weeks, and quarterly we measured up. If you were on plan, here’s your bonus. Your paycheck could vary, but the rep always knew if the customer didn’t pay his bill.
SGF Member 2: Do you keep out a portion of that, when you pay up front? Do you pay only a portion of what the commission was and then pay the rest on actuals?
SGF Member 5: It’s not a draw like that. This is sort of in addition to what they’re going to earn over time. It’s like a signing bonus. We have a recurring revenue stream and we pay them for a certain period of time on that, but that period of time may not start for 9-12 months from the time in which they make the sale. So we can’t wait until 9-12 months later, we’ve got to give them something now. But we don’t take it as a draw against anything in the future. They’ll still earn what the comp plan says they’re going to earn.
MARK DONNOLO: I have a couple of thoughts, because we run into this a lot.
The first is, when you have a long sales cycle, you still want to have a ‘pop’ – some payment to the rep – to recognize the event when it happens. That’s important because it creates excitement. One thing I like to do is understand what the actual risk of take-back is. A lot of that is going to be a question of policy – whether you want to forgive those advances or whether you want to actually take the money back.
If you look historically at the pull-through on those kinds of deals, you can get a sense of if and when that will work in your organization. You can also get a feel for the amount you’re paying. Sometimes when we do an upfront bookings bonus, we’ll discount. For example, if we’re going to pay on the value of the first year’s bookings we may discount that back a certain percentage. We may say, “We’re going to pay 60% of the first year’s bookings because we know on average 60% of that revenue actually comes through, so we’re fairly safe. So we discount it back.” The idea is they’re definitely getting something up front for that ‘pop.’
Upfront payments also drive certain behaviors. A lot of times if you pay a lot up front, when the deal closes the rep is off to the next deal. So if you want them off to the next deal, pay them in full because they’ll be gone. If you want them to stay involved, pay them very little, because they’ll stay involved and pull the rest of the deal through. The bad news is they’ll be hanging around the hoop – they’ll probably turn into more of an account manager role as they try to bring in the rest of the deal. You may say, “Well just get out of here and go sell the new thing.”
You have to find the right balance between the amount of money and the role of the rep.
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