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commission split » ManageBits

Famous Quotations

Success is not final, failure is not fatal: it is the courage to continue that counts -Winston Churchill
 

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Once the general sales management guidelines are set up to follow your overall strategies, you need a set of explicit and strict sales rules to control the sales force’s actions and focus. This type of sales operational tool is a necessity and can not be taken lightly. You need to be clear and strict on the following of these rules or else your salesforce will take your organization apart. A strong and organized sales force is like a well oiled army marching onto the battlefield leading your country to victory. If you can not control your army completely, chaos will follow.

Sales rules need to be straight-forward and precise with a single objective in mind (Close deals and make money!). It has to be established and enforced across the board to everybody in the Sales organization including management. Again the Sales rules should be reviewed annually and not be changed too often or it loses its purpose and effect. Of course, when establishing your sales rules different industries, size of organization, public or private comes into play, but the basic nature of it all remains the same. In setting up your Rule book, it is wise to remind your Sales Organization the basic core values of your corporate culture. Whenever there is a chance, just keep pounding those values into your people’s minds. Sooner or later it will soak into their minds whether they know it or not.
The Sales Rules I’ve used in the past primarily consisted of 3 basic disciplines. When you hear it, you will think it is so basic and strict that it doesn’t even apply to your situation. However, please bear with me and think about it with an open mind. There are many ways you can implement something similar and more consistent with your own industries, but the basic principles remain the same, “You need to make sure your sales organization is efficient, productive and controllable.”

3 Basic Disciplines

  • Working hard and effectively, you will make tons of money!
  • Missing quota for 2 consecutive quarters, you will be terminated! (Sales Executive can waive)
  • 3 major violations of these disciplines, you will be punished! (Sales Executive can waive)

If you can effectively balance this method of highly rewarding your strong sales and effectively disciplining the weaker ones, you will create a competitive and effective sales force while weeding out the ineffective and lazy ones. This method seems harsh, but actually in my 14 years of managing sales we had rarely needed to terminate a salesman because of not meeting their quota. Usually, sales executives and managers are aware of the sales situations like if the sales cycle takes longer or the deal will close but the time is extended in which the sales rules states that the termination can be waived. Usually, these types of rules keeps weaker or lazy sales from joining your organization and bad sales people in your organization will usually resign if they know they cannot achieve their targets because of their lack of ability.
Now, going on to the more detailed aspects of the sales rules like, pricing models, discount approval levels, booking credits, commission structures, maintenance structures, and sales terms & conditions.

Pricing Models are extremely important to your organization and will mean the success or failure of your business revenue goals if you do not set a strategic and clear pricing scheme. This pricing model once set, needs to be communicated to the sales force in a straight-forward and clear manner. It should be simple and easy to follow, where there will be no room for misunderstanding or manipulations. It needs to be stated very clearly to the sales force that no other pricing models are allowed and that the company will not honor any non-discipline-conforming deals.

Discount approval levels should also be conveyed and considered very carefully, because it is money from your pocket that goes out the door when it is given. Whatever discount scheme you come up with based on industry trends, cultures, traditions, etc; it needs to be stated clearly and enforced diligently throughout the sales organization. Here is an example of a typical discount approval level scheme:

  • COO / President                                                           > 40%
  • Sales Division Head (Executive)                               40%
  • Sales Department Manager (2nd line)                    25%
  • Sales Section Manager (1st line)                               20%
  • Sales Representative                                                     10%
  • No maintenance discount!

Once the sales have been closed and the deal is being processed as booking, there needs to be distinct guidelines as to how this booking will be credited. It is imperative to create a structure in which the credit will be assigned and distributed to prevent any arguments and misunderstandings in the sales organization. Here are some possible guidelines used as booking credit scenarios for reference.

  • PO is accepted as booking only after the license agreement is signed off, the order is recorded by Booking Management and signed off by the COO / President
  • Booking credit applies to rentals, time licenses (not maintenance), permanent product licenses (not maintenance), and services
  • Distribution of booking credit and commission split for all POs within one division are decided by Division Head and put in writing
  • For multi-division or multi-business POs, distribution of booking credit and commission split are decided by COO / President and put in writing
  • No accepted-POs (booking or revenue) can ever be canceled by any employee of the organization; Violation will result in job termination!

Commission structures are the most important aspect of sales rules to the salesforce and are also the most sensitive, since it is dealing with their livelihood. Commissions need to be generous enough to lure and keep great sales people but not too easily attained where it allows for people to get fat and lazy. So remember, don’t be too stingy on the commission structures and if you give a great deal, demand a great deal back. Great sales people are resourceful and resilient; they can be pushed very far to achieve great things as long as they are well compensated.

Commission structures need to be well defined in the areas of how (How much?), when (When do I get paid), what (What types of commissions?) and where (Where is the money?).  In defining these areas, you can state something along the lines like:

  • No Permanent License inheritance from resigned or fired Sales Rep,
  • No commission pre-collection due to territory change, or sales assignment change
  • No commission can be collected after resignation or termination
  • Permanent License deal payment:

1.    First 50%:  within 30 days of revenue recognition
2.    Remaining 50%:  within 30 days after the 100% of money collected

  • 15-month Subscription License with payment within the first 12 months:

1.    50% of 85% of total amount (product portion only) within 30 days of revenue recognition
2.    50% of 85% of total amount (product portion only) within 30 days of collection of 100% payments

  • 3-year Subscription License (product portion is 70% of total amount):

1.    The 30% of 70% of total amount’s commission will be paid within 30 days of PO acceptance, the remaining 70% of total amount’s commission will be paid within 30 days of collection of incremental payments

  • 3-year Subscription License (maintenance portion – 30% of total amount):

1.    The first-year maintenance commission (10% of total amount) will be paid within 30 days of collection of incremental payments

  • Subscription License Restriction:

1.   3-year deal must be > $3 million per deal
2.    For the case of longer than 3 years, commission for the $ amount beyond 3 years will not be paid to salesperson

  • Salesperson commission kicker:

1.    Below 150% quota, pay 1.0X base rate
2.    At 150% quota, pay 1.5X re-collectable back to 100%
3.    At 200% quota, pay 2.0X re-collectable back to 150%

  • Sales Associates (GL20):  No kicker

1.    No GL20 can be promoted within the first 2-year assignment

  • Sales Manager’s (Department Head & Section Head) commission kicker:

1.    For incremental amount beyond 100% sales quota, they receives 2X straight commission

After defining some of the basic requirements of the commission structures, there are special circumstances that need to be addressed clearly so that misunderstandings do not arrive and infighting can be reduced. It is best to put these situations down in your rule book and avoid any possible confusion or manipulations by the sales force or sales management. I have listed some examples of special commission situations where it was best to put down in writing ahead of time:

 

  • Only Division Heads and Department Managers are allowed to participate in the discussions regarding commission split or commission change due to configuration remix, however, they have to be extremely careful;  No Sales Rep is allowed to discuss deal splits
  • For large sales contract within one section, Division Head will split the account and purchase orders into multiple territories, and divide booking quota credit as well as commission to all staffed and open positions
  • For account with >$5M potential, Section Managers have to assign more than one sales rep on it; if Section Managers don’t do so, all unassigned territory’s commission goes into Division’s pool and to be distributed to those districts which meet their hiring targets
  • At year-end, all unpaid commission within a division may be used as discretionary bonus by the Division Head
  • When a junior sales rep is assigned to a senior sales rep for the same territory, the senior one will receive an additional 1% of commission from the junior one’s sales results.

In some industries, maintenance contracts are a large source of income and revenue and should be considered in the sales rule book. Maintenance is usually charged to the customers as renewal licenses for the upkeep of the product, support, updates and fixes. This type of sales should be treated differently than from the mainstream orders and should be separated from the commission structure. Various organizations treat Maintenance contracts differently and the way they define their guidelines will reflect these types of differences. However, it is best to state clearly in the sales rule book how the organization defines the maintenance portion of the revenue and how it is reflected in the commission structure. In the past, we differentiated the maintenance portion of the revenue and separated it out from the sales commission structure as follows:

  • No maintenance contract is shorter than 1 year; No discount on maintenance; if you discount without prior written approval from COO/President, you will pay for it! (i.e. deduct from your paycheck)
  • No booking credits on any maintenance deals
  • No commission on maintenance renewals
  • New maintenance & new “others” PO use the same commission rate as new product license sales, but no commission kickers will be applied
  • In all geographical areas, maintenance collection organizations (compensated by straight salary with discretionary bonus) have to be established and they are responsible for booking quota on all maintenance (both new and renewal); All Sales Executive’s performance measurement includes this maintenance revenue

Another important area of concern when dealing with the sales organization is the process of sales terms and conditions (T&Cs). It is mostly a legal concern about liability and protection for the organization in dealing with sales deals. It is too easy for the sales force to promise the sky in order to close the deal, so the necessary guidelines and rules need to be in place to protect the organization from any liabilities or bade deals when it comes to terms & conditions. These are the types of concerns you need to be aware of and here are some sample guidelines for reference:

  • Any proposal or sales quotation for >$5M (total proposed price) requires prior written approval from COO / President before being presented to the prospect; otherwise, the company will not honor the deal (either verbal or written)
  • All sales contracts & license agreements require prior written approval from both Sales Legal and Finance Organizations, but the sign-off process has to be completed within 24 hours;  Any forms of special or deferred payment require prior written approval from both COO / President and Finance Head; No contingent PO is accepted as booking
  • No sales executives, manager, or reps are allowed to sign-off any sales contract or license agreement on behalf of the Company.  Only the authorized personnel from the Sales Legal can sign-off the document, and then the booking can be accepted by Booking Management.  No sales contracts are allowed to be distributed outside of the company.

 

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