Home > Compensation, Executing Your Stratgey, Strategic Alignment & Planning > How to avoid unprofitable & ineffective compensation plans

How to avoid unprofitable & ineffective compensation plans

STOP burning your money!

First of all consider this question.. are you motivating your employees & sales people to drive the results your business actually needs (effective) or just to be busy (ineffective)?

  • Any equity MUST be
    • vested over a period of time (typically 2-4 years) just to be eligible, not just paid out
    • performance based in order to even qualify for vesting
    • time locked to ensure that you get the desired results within the time-frame your business needs them
    • allocated to someone who is actively contributing with effective & significant results
    • side note: always check to ensure ongoing rates
      • I’ve seen too many entrepreneurs or CEO’s give away up to 2 percentage points too much straight out of the starting blocks (!!)
  • Compensation packages must motivate individuals toward the objectives your company actually needs to achieve
    • is profitability important to your business model or stage of your company?
      • will you pay a commission or compensation just on a certain revenue achievement or must that revenue be profitable?
      • how profitable?
    • will you pay all commissions or compensation upon contract signature from your client or will you phase it to ensure better cash-flow?
      • 25% at contract signature?
      • 50% at invoice issued?
        • will you issue the invoice upon termination of service?
        • will you stagger the issuing of invoices to benefit your cash-flow?
        • will there be a warranty period on your invoicing schedule?
        • how will you reflect this in your commission payout?
      • 25% at invoice paid?
    • have different commission accelerators for activities that bring your company greater benefit
      • on products that you want to clear from stock or are strategic to your business needs
      • early, mid or late month, quarter, year if that’s when you want to bring in significant results
    • always “cap” your commission for “over-achievement”
      • motivate your staff to spread the consistent revenue income throughout the year
      • keep them hungry
    • always have a minimum achievement barrier for eligibility of a commission
      • typically 70-80% of budget becomes a trigger
        • i.e. only upon reaching 80% of achieving your sales do you qualify for 80% of your total commission and then incrementally onward
  • Objectives, goals & budgets must be S.M.A.R.T.
    • make plans clear and simple so that your staff is motivated to stretch themselves & achieve their objectives
    • instill milestones to ensure that you monitor the progression
    • create triggers / pulse checks for additional support, adjustment or facing the reality & consequences of short-falls
    • time lock the revenue targets

That last element is the simplest yet the most overlooked item of them all. I’ve seen too many passionate entrepreneurs & CEO’s set sales targets but then leave the window for achievement open.

Here’s a painful example of what can happen:

  • You’ve written into the gals contract that she’s to receive x% commission upon achieving x revenue.
  • You needed the revenue in Q1 and she hasn’t delivered, so you’ve invested in coaching & other resources to help out.
  • Q2 has gone by, then Q3 & finally in Q4 you decide to fire her for non-performance.
  • And guess what happens next?
  • The revenue you badly needed in Q1, Q2 & Q3 never came, but in Q4.. on the 3rd week of December.. a deal finally comes in.
  • Now mind you that you’ve had to lay-off valuable resources because the sales weren’t coming in.
  • If you’re an early-stage entrepreneur you’ve probably had to stop paying yourself along the way for the company to survive.
  • Your head is barely above water, and because you didn’t do your job by time-locking over what period of time the revenue needed to be generated, your gal is about to walk away with a commission check.
  • These are funds your company dearly needed just to stay afloat!

How are you feeling about your situation now?

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