If you haven’t already been following the conversation about selling AV software and services, I encourage you to catch up on my last couple blogs where I lay out the three main issues that I believe are stalling the transition from hardware-based businesses, as well as some specifics on business models that may play a key role.
However, even if management has embraced the need to focus on software and services and done the work to create a business model that is conducive to that goal, the company still needs its salespeople to be on board in order to promote these services to their clients. Given this, there has to be a clear understanding of the sales staff as to how selling these services benefits them from an income perspective. They need to know how they get paid, and that method of payment can’t have a drastic impact in the short term on their monthly income.
Salespeople have obligations, families, and mortgages just like everyone else in the company and it is a matter of practicality. Making a switch to a new business model without re-evaluating how the salespeople are paid may be the recipe for losing the best part of your sales staff. The ones making the most, have the most to lose, and the most opportunities to go find a job somewhere else.
So given all this, how can sales compensation plans be structured to encourage the promotion of software and services and retain top performers?
The most straightforward way to equalize a salesperson’s income in the face of selling software and services is to increase their base pay and decrease their commission percentages, that is if you plan to pay your salespeople monthly commissions based on the revenue or margin generated each month from a software subscription or service plan. This solution may be harder for smaller integrators or manufacturers with tight cash flows, as increasing base pay also increases payroll taxes, workman’s compensation insurance, etc and it may take some time for the new services to outpace these increased costs.
Sometimes the higher base pay may be a temporary device put in place for a set period of time for sales to ramp up and for recurring monthly commissions to become established, and then the company may return to a more traditional model once that has been accomplished.
Many companies that sell services billed monthly or annually actually use this approach. If you look at the Security System or Life Insurance industries you’ll see this model. When a contract is sold, the salesperson will typically get 30-90% of that first year’s contract upfront as a commission and then that rate will drop to a much smaller amount between 3-10% for subsequent years renewals.
To give a common AV-centric example:
Let’s say you sell a control processor for $2000 with $1000 margin. Depending on the company you work for, you may earn 3% of revenue or 10% of margin as a commission. That means this processor sale most likely nets the salesperson anywhere from $60 -$100 in commission.
Now take a control software sale of $300 annually instead. If it is paid out at 30% of its annual value, the salesperson would make $90. Subsequent year’s renewals may only pay $30 each year, meaning the business can make it’s upfront investment back over time.
The advantages of this type of plan instead of a higher base strategy come in payroll tax and insurance savings as well as from the fact that this type of pay is performance based. It is an upfront investment in earning the business, but it is only paid when soft services are sold. This type of plan needs to take into account the flexibility of the sales staff as well and their ability to adapt and succeed quickly, otherwise, they may only last a few months.
Growing the Business
This is actually a structure that I’ve recommended for myself in the past when I was in integration. This type of structure requires a base pay high enough to cover living expenses for the salesperson but stops short of providing much disposable income. Instead of traditional commissions, a bonus plan is built around overall business growth goals. Some of these could include increasing top-line revenues, increasing bottom-line profits, or establishing enough software and service revenues over a prescribed period of time that would be enough to pay for the day to day operations of the business, even when new projects aren’t coming in. Typically these kinds of bonuses are tiered to reward higher performance at a higher rate. They could be quarterly or annually, but the main point is, that they are paid only when the business grows.
This type of plan is more easily implemented in small firms where the efforts of a few individuals are easily seen and where the management structure is flat enough that low performers can’t hide and cheat the system. In larger integration firms, this may be much harder to implement, unless of course, their system offers transparency to each individual’s contributions.
I’ve always been a big picture guy myself, which is why I like this type of structure. It focuses on business growth as defined by revenue, profits, and Recurring Monthly Revenue and it keeps employees focused on the overall business, not just the small portion they get paid on.
At the end of the day, if you’ve decided that the direction of the business requires a shift from hardware-based revenues to a model that relies on a large percentage of software and service sales, then there is a definite need to change sales compensation plans.
Of course, these aren’t the only ways to incentivize employees as businesses shift from high dollar hardware sales to software subscriptions and managed service plans. I’d love to hear your thoughts or plans that you’ve seen that accomplished these same goals.
Leave your ideas in the comments section below.