Sales Compensation in Business Services Firms
When it comes to sales compensation, business services firms pose a unique challenge. By business services firms we mean companies that provide technology implementation, design, maintenance, printing, temporary personnel, etc., to other firms. Unlike a product company that sells “widgets,” a services business essentially sells its people. Similarly, the service is often an extension of the salesperson’s relationship with the customer. Typically it’s more difficult for services firms to differentiate themselves, and these companies are less likely to experience the waves of business common to product firms, where the sales organization enjoys a growth cycle from the launch and subsequent momentum of a new product.
Maintaining and growing your existing client base is certainly going to have a lower cost of sale than acquiring new customers. Significant time and attention should be paid to cultivating and maintaining existing relationships. Unfortunately, the evil twin of relationship management can be complacency; less focus on new services, limited ability to increase prices and insufficient acquisition of new clients. We observe four key sales compensation issues within business services firms looking to re-ignite growth:
- Commission on margin: In a business where the profitability of a deal or customer can vary so significantly there may be a strong desire to pay on margin. The counter argument is that “delivery,” not sales really influences the profitability of the deal. If the delivery team provides the contracted service for a lower cost than estimated the deal will be more profitable. Less efficient, less profitable. For us, the key considerations are the role of the sales person and how much pricing discretion is available. Paying commissions, or bonuses, on margin will certainly engage the rep in the profitability discussion. It also encourages them to stay close to the delivery of the service; potentially a good or a bad thing based on the priorities of the role. From a pricing perspective, the more discretion, the stronger the argument for some kind of margin component.
- Revenue versus bookings: Revenue proponents contend that the sales team shouldn’t get paid until the company is able to invoice the customer (or in some cases until the company receives payment) and paying on revenue encourages the salesperson to better manage the relationship. Bookings advocates point to a similar rationale as not paying on margin and like to point out that bookings measures encourage both new clients and new business within existing relationships. Once again we’re back to the question of role: what is the sales person being asked to accomplish? What are their priorities and if we’re asking them to change, why?
- Quotas: We observe many business services firms where quotas are used for performance management, but are not part of the sales compensation program. Linking quotas to incentive pay is a significant tool available to drive growth. These performance expectations directly tie the productivity of the sales team to the business plan. Further, within sales organizations historically paid on revenue, new business quotas can represent a major cultural shift and drive additional changes across the organization. One cautionary note; the potential change brought by the introduction of quotas, means getting the quotas “right” should not be trivialized. Revenue based quotas have their own issues, but setting a bookings goal for the first time requires careful thought and preparation. Unrealistic or unachievable quotas can have an incredibly negative impact on the organization.
- Sales expectations for delivery teams: Within many organizations the role of the deliver team is to provide a high quality service and ensure the client’s satisfaction; can the customer be used as a “reference.” Maybe there is a referral bonus available or even a SPIFF. But in other organizations, offering new services to the client is part of the satisfaction equation. Scott’s recent experience with AAA is a perfect example (Sales is Service). For companies that believe in the service they provide, we think it a mistake to not at least consider the role of sales incentives for the delivery teams. The incentive might represent a smaller portion of total pay relative to other priorities, but its absence often represents a missed opportunity. Organizations that introduce a sales incentive need to train team members on their role in the sales process, as well as how to identify opportunities.
Beyond the question of sales compensation, role design and account assignments play critical roles in the management of a business services sales team. Effective sales compensation plans are predicated on clear roles and selling priorities. Questions about how services salespeople should spend their time must be answered before any sales compensation decisions are made. In a recent survey of incentive plan participants within a services organization, over 30% of the field said their incentive plans are not aligned with their roles and over 40% said they weren’t sure or don’t believe the plan supports the priorities of the business. As sales compensation designers, numbers like that are like a big red flare, regardless of what industry they represent.
Interesting, it was additional headcount or training that over 20% of the respondents found did not provide meaningful return on investment (ROI).
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