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Building Your Cloud Sales Culture and Compensation Plan

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1 Building Your Cloud Sales Culture and Compensation Plan
Gary Beechum SPC International

2 Compensation strategies
Commissions normally account for 30% to 50% of a salesperson’s total compensation – A salesperson should generate sales equal to 4 to 4.5 times their compensation in gross profit or margin at a minimum Can be structured as base plus, base against or straight commission – for example 35% base plus or against commission or straight commission 30% Commission Only A generally accepted industry statistic regarding compensation is that a salesperson should generate four to four and a half times their compensation in gross profit. This means that a salesperson earning $100,000 a year should be generating anywhere from $400,000 to $450,000 in gross profit per year, with 30% to 50% of that compensation based upon commissions. A compensation plan for a new sales person will normally be structured as either base plus commission, or base against commission. A base is a guaranteed amount of compensation the salesperson will receive each month, regardless of whether they sell or not – but if they do sell, additional commissions can be realized. In a base plus commission compensation plan, generally lower commission percentages are structured in to offset the guaranteed base. In a base against commission plan, once the salesperson’s commission has exceeded their base, their compensation plan pays them their commissions only. Good base plus commission compensation plans will require the sales person to exceed their base for several consecutive months before triggering a commission-only transition in their compensation plan. This insures that the salesperson can consistently exceed their base before removing it. In base against commission plans, generally higher commission percentages are offered, in consideration of the sales person’s losing their guaranteed base after exceeding it through commissions earned. Commission-only compensation plans are also an option, but it’s much more difficult to attract top talent with this type of compensation plan, as a seasoned salesperson realizes that it takes time to ramp up in a new sales position, and gain product and sales-specific knowledge in any new opportunity, and will not want to risk the possibility of receiving no income until they’ve made their first sale. Current trends indicate base salaries in our industry falling somewhere between 15% and 40% of a salesperson’s total compensation, with the balance of 60% to 85% being made up in commissions. Following this logic, a well-balanced compensation plan would then be structured so that 35% of a new sales person’s total compensation would be realized by a base salary, and the remaining 65% earned in commissions in a base plus commission compensation plan. So in our example in the table, a base of roughly $3,500 per month would be assigned to a new sales person. As they gain experience and become more successful at closing sales, their additional commissions would increase their total compensation. In a base against commission plan, we would still assign a base monthly amount of roughly $3,500 per month, but as soon as the salesperson’s commissions exceeds this base for an established period of time, their compensation would revert to a commission-only structure. As mentioned, the base and commission percentages would be adjusted based upon whether the compensation plan is designed as base plus commission, base against commission, or commission only. As an example, if your organization realizes a blended gross margin across all services of 35%, a sales compensation plan based upon a sales person generating 4x gross profit would look similar to this table. The monthly sales column illustrates the salesperson’s gross monthly sales. The GM per Month column illustrates the gross margin, or gross profit of the corresponding value in the Monthly Sales column. The Yearly Sales column illustrates the corresponding value in the Monthly Sales column multiplied by 12, and the Comp column illustrates a commission-only based yearly compensation calculated at a blended 30% commission across GM Per Year. In other words, the sales person’s compensation is equal to a commission of 30% of their gross margin sales in this example. As you can see in the last row, yearly sales of 1.14 million dollars at a 35% gross margin yield 399,000 dollars in GM per year, providing the salesperson 119,700 dollars in compensation at a 30% commission on their gross margin sales.

3 Compensation strategies
Cloud or Managed Services Residuals? Sales staff perform best when they are compensated for all services they sell or influence, and some best-in-class MSPs provide their sales staff additional residual commissions for annuity-based sales for products such as Managed Services Agreements. One strategy to compensate for these types of sales is to commission the salesperson an amount equal to one month of the service agreement’s value, paid out over a period of time, or all at once. For example, if a Managed Services Agreement worth $1,000 a month is sold, some MSPs compensate their sales staff $1,000 as a commission for the sale. Some do it all at once, and some break it up over a period of time. This commission is paid in addition to any other annuity-based residuals which might be included in their compensation plan. Not all MSPs offer annuity-based commissions for these sales after the fact, but for the ones that do, they generally vary from 1% to 5%, and are sometimes governed by a sliding scale based upon the monthly value of the agreement, as well as other factors, such as the length of the agreement. Take a look at this example of a Managed Services Agreement residual commission strategy. The Monthly column Illustrates the value of the monthly invoice for the Managed Services Agreement. The GM column Illustrates the gross margin of the corresponding value in the Monthly column. The Commission column illustrates the sliding commission scale based upon the corresponding value in the Monthly column, and the Monthly Annuity column illustrates the monthly annuity amount commissionable to the salesperson for each Managed Services Agreement sold. One benefit to including a residual as part of the commission for annuity sales is to provide an additional incentive for the salesperson to remain in the company’s employ. A recommendation with this strategy is that there be an established minimum sales quota that the salesperson must meet each month in order to qualify to receive their residual commissions. You don’t want to create a situation where the salesperson can take a month off and continue to receive their residuals – residual commissions should be qualified for through continued performance. Some MSPs also commission a percentage of the first month’s agreement value upon renewal. For example, if a client renews a Managed Service Agreement worth $1,000 per month, a 50% commission would net the sales person $500. Again, the percentage of commission on renewals varies among MSPs if it’s offered at all, as well as its method of distribution.

4 Compensation strategies
Projects including commission-able labor and Hardware /Software What about project sales? Let’s break down the commission to a salesperson for a new project they’ve sold. In this example you’ve got an infrastructure project valued at $60,000, with labor comprising $25,000, and the hardware/software portion comprising $35,000 of the total invoice. Let’s also assume that your margin on the labor is 40% of the total billable cost, and the margin on hardware and software is 15%. In this example, your sales person’s commission will be based upon these gross margin numbers. Let’s give your salesperson a 20% commission on labor sales, and a 10% commission for hardware/software sales for this particular project. As your gross margin on labor is $10,000, and your gross margin on hardware and software is $5,250 for this project, your salesperson’s total commission for this $60,000 project sale is $2,525.

5 Compensation strategies
Sliding scale commissions for projects Let’s now take a look at a very simple commission plan displayed in this table. The GM Labor column illustrates the gross margin value of the invoiced amount of project labor. The Labor Commission column illustrates the commission percentage paid on the corresponding value in the GM Labor column. The GM HW/SW column illustrates the gross margin value of the invoiced amount of project hardware and software, and the HW/SW Commission column illustrates the commission percentage paid on the corresponding value in the GM HW/SW column. Once you’ve determined what your own gross margins are for project labor and hardware/software sales, Managed Services deliverables, and all of your other products and services, you will be able to create a compensation plan that rewards performance, while guaranteeing profitability. Remember to include monthly and quarterly sales goals that your sales staff will need to achieve, and bonus on their attainment as you see appropriate. A yearly bonus for achieving a stretch goal is always a great motivator for keeping sales professionals selling through the fourth quarter, where it becomes more difficult to close business due to the holiday season, when decision-maker availability is at a premium.

6 Compensation strategies
All together Let’s put our entire example sales compensation plan all together in a very basic table for analysis. Remember to keep in mind that all commissions are paid on GM or gross margin, so in the bottom section of the table titled Managed Services, Software License and Product Warranty Renewal Commissions, the values in the Commission column are calculated as a percentage of the corresponding GM column. For example, if a hardware warranty renewal is invoiced at $450, and our GM is $90, or 20%, then our salesperson’s commission is 20% of our GM, or $18, for facilitating that renewal. You will need to do your own legwork and investigation into what your true gross margins and profitability are for each of your services, products and solutions. From there, you’ve got to come up with a realistic expectation of how much of each of these a trained salesperson can sell in a year’s time. Based on this data, you will then need to create an attractive compensation plan that allows your sales staff to earn 65% or so of their salary through commissions and bonuses. Once you have established your compensation plan, you will review on a quarterly basis to make necessary adjustments. A good compensation plan focused on profitability for your organization and fair and equitable compensation for your sales staff must be regularly reviewed and modified to keep pace with changes in your product, solution and service gross margins and net profits, while continuing to motivate and incent your sales staff.

7 Review Calculate gross margin for every single product or service you sell Decide what your base salary and commission structure will be Decide on an equitable commission percentage for each of your products and services based upon gross profit, or margin Decide whether or not to include residuals as commission for annuity-based services Decide on whether or not to commission on renewals of licensing, services, warranties and service agreements Let’s review some key points to think about when developing your compensation plan for sales staff. Calculate your gross margin for every single product or service you sell. This is critical in determining your base salary and commission plans. Forecast how much of each product and service you offer that a trained, aggressive salesperson could sell monthly and yearly in aggregate. Decide on what your base salary and commission structure will be. Remember – a well-balanced compensation plan suggests that a salesperson’s base salary should be 35% of their total compensation. The balance of your salesperson’s salary should be attained through commissions earned. Use your forecasted sales potential as a guide here. Decide on an equitable commission percentage for each of your products and services based upon gross profit, or margin. Use your base salary and commission structuring exercise as a guide, and standardize upon it. Decide on whether or not to include annuity, or residuals as commission for annuity-based services. This decision will affect your calculations in terms of exponential residuals paid to sales people – forecast out residual payments based upon sales potential for ten years – this will significantly affect the residual percentage you’re willing to offer them. Decide on whether or not to commission on renewals of licensing, services, warranties and service agreements. Again, factor in your commission percentages based upon sales potential, and calculate commissions accordingly. When your compensation plan is complete, you will be much better prepared to negotiate with potential new sales staff hires – secure in the fact that your compensation plan is fair, and insures your profitability through their success. It will be much more difficult for a savvy sales person to convince you to let them write their own meal ticket, once you’ve hammered out the numbers and have them documented as a standard.

8 The employment ad Your company name and location
Job status – Full or Part Time Employee, Contractor Required experience – 5 years Job category– Sales Career level – Experienced Job description Skills required Benefits Contact information A well-crafted employment ad for sales staff must accurately reflect the role you are hiring for, as well as the requirements necessary for consideration. The more specific the job description, the better. In order to attract the best talent, your employment ad needs to really sell your organization, and focus on illustrating benefits attractive to sales professionals, who are primarily motivated by money, secondarily by utilizing their own special sales abilities, and thirdly by being of service to others. Thus, effective employment ads for sales staff highlight these specific areas in the body of the employment ad. Your job is to effectively promote your employment opportunity to the best sales candidates available. You are not looking for anybody that can fog a mirror – you want seasoned sales professionals, whose past performance is an indicator of their future potential.

9 Resume review Proximity to work location Currently employed?
Employment history tenure – look for red flags Relevant experience? Salary History – base/commission Sales goal attainment Candidate? – phone interview Check References Once you’ve posted your employment ad to your preferred job boards, and have begun to receive resumes, items to note when sorting through your potential candidates include their proximity to your offices or primary job site, whether or not they are currently employed, and if so, where and for how long? The number of employers they have worked for during the last 10 years, and the frequency that they switched employers. Read between the lines for their stated reasons for job migration – is the candidate a serial opportunist, or do they grow roots with their employers? Are they looking for a home, or a rest stop before the next opportunity presents itself? You will also be reconciling relevant real-life work experience, and a salary history in line with your expectations. Your list of potential candidates will then be contacted for a phone interview, during which they will be informed of the requirement for a criminal background check and drug screening, if they are considered for the position. The top candidates that survive will then have their references checked.

10 The interview Timeliness Appearance – first impression Confidence
Explore employment background and relevant experience Experience in your industry? Sales performance metrics Knowledge of IT sales process Conduct sales examinations Culture suitability? Top candidates whose references check out will be invited to a live interview. Keep in mind the candidate’s current employment situation during the interview process, and ask pointed questions regarding their prior and current employment history. A great candidate should not currently be out of work, unless there is a very compelling reason for it. It is simple logic to assume that successful, aggressive and motivated salesperson worth their salt should currently be employed. And if they are successful, they should look and act the part. A good candidate realizes the value of first impressions. If they’re not dressed to impress, and speak confidently and articulately during interviews, that’s a red flag. Successful sales candidates will have a firm knowledge of their compensation history at previous employers, and be able to communicate their past commission and bonus plans, as well as their monthly and yearly income for the past 5 years. You will also ask them specific questions about their sales quotas, and how often they exceeded them (and by how much), and how often they failed to achieve them.

11 5 ways to evaluate a sales professional
1. CRM and sales tracking process Does the sales professional have an existing process for tracking all prospects and suspects? Do they already track gross calls and follow-ups? 100 outbound call attempts per day? Do they know the average hit ratio of gross calls and net calls to set an appointment? Can they easily establish a sales funnel report in either excel or a CRM program? Have the sales professional explain their process for negotiating the gatekeeper Listen to their 30 second pitch as a Decision Maker You will want to evaluate the candidate in 5 areas prior to making your hiring decision. The first area you will discuss is their knowledge and experience in tracking sales activity, including all contacts with leads, prospects and existing clients. This will help you determine whether they are better suited as a “hunter” or “farmer”, and based upon your needs, whether or not they are a qualified candidate to fill your open sales position. Have the candidate walk you through successful techniques they have used to get past the gatekeeper to the decision-maker, then have them pitch you as the decision-maker for a product or service they have sold in the past.

12 5 ways to evaluate a sales professional
2. Understanding the difference between product knowledge and client relationships Does the sales professional spend more time on “speeds & feeds” than highlighting features and benefits? Do you have to convince them of the importance of being liked by prospects? Do people tend to like the sales professional easily, either on the phone or in person? Does the sales professional make friends easily and do they have a lot of friends? Evaluate how the candidate positions their pitch – do they focus on feature and benefit, or technical data? Does the candidate come across as relaxed, and easy to speak with? Are they likable and able to “break the ice” naturally to begin building rapport with prospects?

13 5 ways to evaluate a sales professional
3. Can the sales professional qualify a prospect on the phone and in person? Evaluate the sales professional’s qualifying questions for a prospect in a role-playing session Ask them the difference between a prospect and a suspect Ask them to project a sales cycle in terms of initial call to closing an opportunity, once they understand the product or service What is the candidate’s level of understanding of the 7-step sales process? Are they able to skillfully qualify you during a mock presentation? Are they experienced enough to intelligently walk you through the sales cycle of a product or service they have sold in the past, or your own services, and forecast a realistic timeline from initial meeting to closing an opportunity?

14 5 ways to evaluate a sales professional
4. Can the sales professional present your products and services effectively? Sales Skills tests can help evaluate the sales professional’s presentation ability and comprehension of the sales process Has the salesperson ever attended Toastmasters? Have the salesperson conduct a PowerPoint presentation Once the candidate has been briefed on your products and services, are they able to convincingly present them to you during the interview? What types of professional development or sales training has the candidate participated in? Are they familiar with Microsoft PowerPoint, and can they create and deliver a PowerPoint presentation?

15 5 ways to evaluate a sales professional
5. Can the sales professional secure an appointment over the phone and close business during an onsite engagement? Sales Skills tests will give you some idea if the salesperson can close Role play with them once they understand your product or services and determine if you would buy from them Record all role playing sessions for review Role play with the candidate through a cold phone call scenario and initial client meeting as the prospect and evaluate their potential for success after being fully trained on your products and services. It is a good idea to record these mock scenarios for later review against other candidates to assist you in making the best hiring decision. There are also a wide variety of sales skills test that can be taken online with results immediately available after completion, that offer a measurable baseline to judge all candidates from.

16 The offer letter Details intent to hire candidate
Documents roles and responsibilities Establishes compensation, bonus and benefits Once you’ve made your hiring decision, an offer letter properly reflects your intent to hire the candidate and spells out their expected role and responsibilities as an employee, terms of their employment and documents their compensation plan.

17 The employment agreement
Details employee’s job title Documents roles and responsibilities Contains Non-Disclosure agreement Includes Non-Compete language Once the candidate has accepted your offer of employment, you will provide them your employment agreement to review and sign. This ratifies the employee’s title, role and responsibilities, and includes your non-disclosure and non-compete instruments.

18 The equipment loan agreement
Covers company-owned equipment provided to staff Documents equipment loaned, serial numbers and value Employee is responsible for maintaining equipment in good condition and for its security Upon voluntary departure or termination, employee agrees to forfeit cost of replacement from their pay should they fail to return it per the terms of their employment agreement All of your company-owned equipment that is provided to your employees for use in executing their responsibilities will be documented with an equipment loan agreement. This instrument is used to document the serial numbers and value of all loaned equipment such as laptops, cell phones, hardware, company vehicles, etc., and when signed by the employee assigns responsibility to keep the equipment secure and in good working order and to surrender it upon their departure from your employment per the terms of their employment agreement, or risk forfeiture of its replacement cost from any outstanding wages owed them.

19 The hiring checklist Develop a hiring checklist for new hires – customize per role Standardizes HR process Insures required procedures are completed Speeds On-Boarding of new staff HR Hiring Checklist for a New Salesperson SSI SSI It is helpful to develop a hiring checklist to standardize the HR process for new hires and insure all necessary tasks are completed in the proper sequence, easing the on-boarding process for new employees and properly preparing them for their new role with your organization.

20 Training sales staff Role play, role play, role play
Company overview training HR process training Administrative training Internal company policies Product and service training Lead generation training Sales tracking training Sales process training Sales expectations Self-study Sales meetings and reporting Listen-ins and ride-alongs Role play, role play, role play Training your staff for sales and customer service excellence is a process that never ends, and for a new employee, the training you provide them during their probation period is critical to their success in becoming a valuable asset to your organization. You will focus their training on day-to-day sales tasks, the tools and technology that they will use to execute these tasks, and the processes and procedures they will follow to document, track and complete these tasks satisfactorily. Although sales training is important, you will also want to insure your new staff is trained on and understands your internal company policies, and how and what their performance will be evaluated on in order to achieve bonuses or other recognition that is a component of their compensation plan.



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