Beth Carroll | Prosperio Group
How do you provide on-going sales credit for a hunter sales rep, without creating the complacency engendered by the annuity aspect of this arrangement? This is an age-old question, certainly as old as sales commission plans and one that companies constantly struggle with. It doesn’t feel right to cut off credit for a customer that the sale rep sold, even if the sale was many years ago and the account is mostly managed by an account management team, but if you don’t cut off credit your costs will go through the roof. So, what do you do?
My first advice, always and for nearly every situation, is to consider if you can set reasonable goals for the role, or if you need to set personal level goals. This would allow you to set a total portfolio goal (which one would assume would include a growth expectation each year) as well as a new business goal, thereby ensuring that the rep cannot make full incentive without also achieving the new business goal.
However, it’s often either impossible or impractical to set individualized goals for these roles, and so management reverts to the more accessible “commission” approach to paying reps. When talking about a hunter role that is largely responsible for landing an account and then handing off day-to-day management to another person or team of people, you absolutely DO NOT want to pay a flat percentage of all sales in perpetuity. First, in some states, if you do not word your plan document well, you may find the rep suing you for on-going commissions even after they leave the company! Secondly, after a time the rep will see that enough money is coming in from prior year sales that they really don’t need to do anything much this year and they will still make plenty of money. This is not going to make any owner worth his salt happy.
There are two fixes to this. One is relatively easy and the other is a bit more complicated. The easy one is probably familiar to many of you: an account level declining commission. In this approach, a higher rate of commission is paid for the first 12 months from the first load shipment date (or delivery, or invoice, or payment), then it lowers for the second 12 months, then lowers again for the third 12 months, and then either goes to nothing or goes to a very small on-going commission. It doesn’t have to be in 12-month periods, of course. That’s just the most common approach. For a small number of accounts this is manageable, but if you have a lot of sales reps with a lot of accounts the tracking on this can become quite administratively burdensome.
The other fix is more complicated and requires a bit more planning, but in the long-run, it can often be a better solution as you don’t have to track accounts individually with start and end dates. In this approach, which we call a “Bank” you give perpetual credit to a sales rep for accounts that they sell. There is no end and no decline in the commission – in fact, the commission rate often goes up. The only catch is the commission is paid in tranches or buckets, and you have to reach a bucket line to trigger a payout.
Imagine, if you will, a bucket that has lines scored on the side to indicate fill level. Every account closed by the rep is a hose added to the bucket. Some hoses have a high rate of flow, others a low rate. But they are all working to fill the bucket. When the water in the bucket reaches a marker line, then a payment is triggered. If you pay monthly, then this trigger must happen before the month end close to trip a payout for that month. If not, the rep is waiting until the end of the next month for that payout. In the next month, two bucket lines may be crossed and then two payouts are triggered. This bucketing approach is what keeps this method from becoming an annuity. In a flat commission, a payout would happen each month regardless of volume. The Bank forces the rep to consider volume and velocity (and what happens if a hose falls out of the bucket? It must be replaced of course with another hose).
WHEN TALKING ABOUT A HUNGER ROLE THAT IS LARGELY RESPONSIBLE FOR LANDING AN ACCOUNT AND THEN HANDING OFF DAY-TO-DAY MANAGEMENT TO ANOTHER PERSON OR TEAM OF PEOPLE, YOU ABSOLUTELY DO NOT WANT TO PAY A FLAT PERCENTAGE OF ALL SALES IN PERPETUITY.
OK, so once enough hoses are in the bucket and the fill rate is sufficient, wouldn’t a payout happen pretty much every month? Yep. Probably, so at higher fill levels (more time has passed) the lines on the outside of the bucket get farther and farther apart. This forces the rep to consider GROWTH as a part of the equations. While it may be fine to do $20k a month for the first 6 months, after that the expectation would be $30k a month, then $40k a month, etc. Often, I recommend tweaking the acceleration rate about every 6 months, while ALSO increasing the payout rate. So, if the pay for $20k tranches was $1,000 when each bucket line was reached (5% marginal commission rate – $1k paid for $20k in production), then at $30k maybe the payout should be $1,600 (5.3%). This creates a longevity bonus for sales reps that stay with you for a long time as their pay for production (but we aren’t communicating this as a commission because it isn’t! This is important!) is increasing at higher and higher production and longer time with the company.
Note that there is never a reset on the Bank. You just pick a point in time to begin the calculations and then go from there forever. You, of course, will have to keep adding lines to the bucket (it’s a really, really, tall bucket) as it’s never emptied. Once a load has shipped it’s ALWAYS in the bucket. And it never resets. It just keeps getting bigger. At some point, you will need to level off the pay increases relative to the production increases, and keep them more steady (otherwise after several years you could end up paying out 100% of the margin), but by that point, the rep is hooked on the Bank anyway.
From an economic standpoint, part of how you decide how far apart the bucket lines are (and how much you are paying for production) is the consideration to how many other people are being paid on this same gross margin, and what the level of salary is for the sales rep. You need to be sure you aren’t creating too lucrative a system that will blow up your company economics. At the end of every design process, even if it is for just one role, always model the cost implications for all of the roles in your company that are on incentive pay. An additional takeaway – it’s fine to double pay as long as you double goal. Yes, you can pay an outside sales rep for a load, an account manager for a load, and a carrier sales rep for a load. You just have to factor into their goals or expectations that they are one of two or three people that are making that load happen. So, if the monthly expectation for a one-man band is $10k a month, then when someone is only doing 1/3 of the work, their monthly expectation is $30k. Using a commission calculation approach, this means a 15% commission for the one-man band has become a 5% commission for the person doing a portion of the work. However, I didn’t divide the commission rate by 3 to get there. Instead, I said $10k is the denominator for the one-man band (market pay is $1,500, so the rate is 15%) and $30k is the denominator for the 1/3 effort rep (market pay is still $1,500, so the rate is 5%). If for one of the roles market pay is $1k, then their rate would be 3.33% for $30k in production. Always start with how much you want to pay in total, how much is salary versus incentive, and then how much of incentive is in THIS element. Then figure your production expectation for the team and the role. Divide desired pay into product to get your “base rate” and then scale it up or down from there depending on your compensation approach.
The Bank is a nifty tool, but it can be a bit complex and hard to grasp and there are many possible misinterpretations. Please email [email protected] if you’d like a simple Excel template of a Bank so you can understand better how they work.
Beth Carroll is owner of Prosperio Group, a compensation consulting firm located in New Lenox, IL. She may be reached at [email protected] or 815-302-1030.
Image credits: ID: 1176063592; studiostoks/Shutterstock.com; ID: 192480929; iQoncept/Shutterstock.com