Commissions That Smooth Out Sales
Mike Duffy, the new vice-president of sales at Software 2000 Inc., inherited a common sales manager's problem: too many of the company's sales -- fully half, in fact -- closed during the company's last fiscal quarter.
Annual sales were growing nicely for the privately held computer-software developer based in Hyannis, Mass. Sales rose from $20 million in 1988 to $28.6 million in 1990. But lumping most of the sales into the final quarter -- and a good part of those into the final month -- caused a hardship for the rest of the company. With every sale came a demand to ser-vice the new customer. "We couldn't keep up with the growth spike at the end of the year," says Software 2000 president Doug MacIntyre.
The spike was only partially a function of customer demand. It was also a consequence of the company's sales-commission structure. Like a lot of companies that rely on a field sales force, MacIntyre motivated his people by raising their commission rates on sales exceeding quota -- the more a salesperson sold in a year, the higher the commission rate on that year's sales. So the incentive was to close as many sales as possible before the end of the year, while the salesperson could still earn the highest commission rate.
To change their sales reps' behavior -- and to smooth out the company's sales and production load -- Duffy and MacIntyre revised the commission structure.
Now the commission-rate multiplier changes monthly in proportion to the rep's performance -- total actual divided by total quota -- over the previous six months. That means that the sales rep's performance this month will affect future commission rates, but the current month's rate is strictly a function of past performance.
The purpose of this "rolling quota" compensation plan is to keep sales at or above quota every month. The result is a smoother, more predictable revenue flow and the ability to better predict the need for customer-support services.
Why a six-month rolling quota? According to Atlanta consultant Warren Culpepper, who helped Software 2000 design its new system, the length of the period depends in part on the length of the company's typical sales cycle. If closing a sale normally takes 90 days, you want the period of your rolling quota to be longer than that. Ideally, says Culpepper, you want the period to cover enough sales to provide some consistency over time. But if you make the rolling-quota period too long, salespeople will find it difficult to affect their commission-rate multipliers in a reasonable length of time.
When kicking off a rolling-quota plan, you must start everyone out with an assumed past performance. Start with numbers somewhat lower than you actually expect. If your real monthly quota is, say, $100,000, and you're going to calculate your average over six months as Software 2000 does, you might assume each rep met an $85,000 quota in each of the previous six months. That way, in the early months of the new system salespeople have only to hit their quotas to kick their commission rates up a little. They'll come to like the new plan sooner.
The most common error people make in designing plans like this, says Culpepper, is to include the current month in the rolling average. Don't do it. That allows a sales rep to affect the rate paid on this month's sales -- precisely what you're trying to avoid. -- Tom Richman* * *