Incentives for the Long Haul

Whether in books, magazines or on the Web, there’s no shortage of advice available for individuals charged with designing sales incentive compensation plans. But where do you go if your sales force operates differently than the typical, mainstream sales organizations most of this advice targets? If you’re smart, you turn to David Cichelli, author of Compensating the Sales Force: A Practical Guide to Designing Winning Sales Compensation Plans (McGraw-Hill, 2004) and senior vice president of The Alexander Group (www.alexandergroupinc.com), a sales effectiveness consulting firm.

Among the most vexing conditions facing sales compensation designers, as Cichelli puts it, is the challenge of multiyear contracts. If all revenue isn’t realized at the time of sale, how should sales reps be compensated? Should they still get their full commissions as soon as the sale is made? What if the contract is canceled at some point prior to fulfillment?

Cichelli suggests three possible solutions to the multiyear contract conundrum.

1. Stagger payments. Dole out compensation throughout the life of the contract, but front-end it with larger payments that slowly decrease over time.
2. Run the numbers. Calculate what Cichelli calls the “location life revenue” based on an estimate of the contract’s lifetime revenue contribution and make a payment now with a net present value discount.
3. Give baby bonuses. Give salespeople contract-signing bonuses at the time of the order, with payment determined by your best estimate of the contract’s value.

Cichelli recommends against treating continuing revenue the same as new revenue because that creates an annuity mentality and rewards farming established accounts rather than hunting up new customers.

Another troublesome compensation challenge Cichelli identifies is the problem of rewarding reps who sell through long sales cycles. Classic quota systems, he says, don’t work with long-term sales because, among other reasons, salespeople cannot go long periods without earnings while waiting 12 months or longer for sales to close.

To keep such salespeople motivated, Cichelli suggests maintaining accountability by requiring in-person once-a-month status reports on major customers to headquarters sales, product and finance management.

From a compensation standpoint, he offers the following four alternatives.

1. Reward actions. Raise reps’ base salary, minimize the upside potential and develop incentives tied to achieving the incremental steps most likely to lead to closed sales.
2. Take a chance. If salespeople are up for it, pay them in a boom/bust manner with a low base pay that spikes when they close sales. As Cichelli puts it, “When you win, you win; when you lose, you lose.”
3. Give a signing bonus. Let reps earn up to their targets based on the incremental steps you reward, then offer contract signing bonuses when deals close.
4. Pay for performance. Long-term sales typically involve comprehensive strategic customer account plans. Use compensation to turn your reps into asset managers who are rewarded for performance against these plans.