Dear Workforce What Rewards Would Suit Professionals Who Generate New Business

By Staff Report

Jul. 16, 2004

Dear Quizzed:

The key question to ask: how firm are the terms of the contract? If the contract terms and value have a high probability of occurrence, then the payment should be provided when the contract is won. Typically, you’d have some type of bonus program, with increases in the payment based on the face value of the contract. For instance, contracts of less than $2 million could provide the seller a bonus of $25,000. Contracts worth $2 million to $5 million could provide a bonus of $50,000, while contracts generating more than $5 million could provide a $75,000 incentive bonus.

To ensure that earnings motivate employees and meet their expectations, the company needs to estimate the number of contracts it expects to land. Any contracts over the target should provide the employee with “upside” dollars earned for exceeding the goal.

Companies, however, shouldn’t pay people solely for new contracts. They should give incentives for actual current-year revenue (all contracts, regardless of the year they closed). Think of this as the value of the assets employees have helped create. There might be $50,000 in incentives available, with $30,000 (60 percent) available for new contracts and $20,000 (40 percent) available for total revenue achievement.

Many companies might be tempted to base the reward on the profitability of the contracts over time, rather than on revenue. Business developers rarely, however, control the execution of contracts after the sale, so revenue is typically a better measure of long-term success.

To make things fair, companies should establish multi-year revenue objectives for salespeople in advance. This means something like the following:

  • Year 1 – Total Recognized Revenue of $2 million
  • Year 2 – Total Recognized Revenue of $6 million
  • Year 3 – Total Recognized Revenue of $12 million

This allows the company to ensure that payments are for value realized, not possible future value. There’s often a high threshold before the payout begins (such as 80 percent of the goal), and the company’s exposure is limited (such as a maximum payout of 200 percent of the goal).

Committing to a multi-year plan in advance presents the biggest hurdle for most companies. Restating the objective will be very de-motivating to your sales staff, unless it comes down. Companies should determine whether these roles will be stable and ensure that employees will value the long-term reward. Companies also need to determine how to “buy the seller out” of the future value if they choose to end the program or reassign or promote the employee.

SOURCE: Ted Briggs, national head of the sales force effectiveness and marketing practice,Sibson Consulting, the human capital consulting division of The Segal Company, New York City, Aug. 19, 2003.

LEARN MORE:Incentives and the Art of Changing Behavior.

The information contained in this article is intended to provide useful information on the topic covered, but should not be construed as legal advice or a legal opinion. Also remember that state laws may differ from the federal law.

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