Startups struggle with traction and growth, and one of the critical levers to grow and scale is compensation of the team. The founding team is usually in it for the long-haul, and equity, ownership or shares are an important element that makes up the majority of their long-term compensation plan.
Early-stage founders that are bootstrapping may take no cash pay, or take home a small salary that pays for personal and living expenses, which gradually rise as profitability and investments increase.
When a startup starts to hire people, asking them to accept salaries below market in exchange for equity may not be a viable option for in-demand high performing talent. When on boarding team members such as sales and business development reps, having a sales incentive plan as a component of salary can help with drive traction and growth.
Allied Legal’s Sales-as-a-Service team often assists startups with structuring and implementing compensation plans. In this article on startup sales we will outline the golden rules in designing sales incentive plans.
Types of Incentives
Incentives are great drivers of attracting and retaining talent. Incentives may consist of:
- Bonuses: can be set up to directly drive and support the company’s needs, and are usually based on KPI’s such as profitability, revenue or completion of a projects or significant milestone.
- Profit Sharing: a payment that is generally paid out annually, and is tied to the company’s profits. It is usually a pre-determined percentage that has been communicated broadly, and is also often tied to KPIs.
- Stock Options: these may be offered to key employees in lieu of a higher salary—especially where the business is not yet profitable and/or cash flow is constrained. Generally, stock options be exercised by the individual at any time during the agreed-upon term and subject to any vesting schedule.
Commission
Commissions arrangements are a common way to motivate salespeople for securing the sale of a product or service. The intent is to create a strong incentive for the individual to work to drive the desired outcomes for the business.
Payment may be a straight commission, ie with no base salary or a combination of base salary and commission. For example on straight commission, the salesperson may achieve 10% of the sale price as commission. In a base/salary combination it might be based as percentage full year quota attainment that is paid pro-rate in a given quarter of the year.
In general, the commission structure is based on reaching specific targets or quotas that have been previously agreed upon by management and the employee. These targets or quotas are typically tied to sales revenue, unit sales or some other volume-based metric.
We advise seeking legal advice before initiating any commission arrangement with your employees to ensure you are compliant with your fair work obligations.
Rules for Building your Sales Plan
- Keep it simple — Don’t overcomplicate the sales incentive plan by overloading it with too many priorities. Once you put the plan together, talk to members of your team and have them explain it back to you to ensure that everyone’s oblgiations and entitlements are clear.
- It should be achievable and challenging. You don’t want a sale incentive plan that no-one is able to achieve, yet you also don’t want a plan that is just too easy to satisfy.
- Unchangeable – once the sales incentive plan is broadly communicated, then don’t change it. Your staff should know what is expected of them and be clear on their entitlements when they achieve these goals. If you change the goals, then you risk confusing the arrangement. It’s important to have thought of variables and contingencies. For example, if one sale rep leaves and a new rep takes over the territory, how will this impact their respective incentive plans?
- Communicate – it’s important to communicate the sales incentive plan prior to the relevant period. The faster the team knows what they have to do, and how they will be compensated, the better they will start.
- Keep it clear – It should be easy to measure and know how the sales rep is performing. If the data to measure is not easily available, or if there is not an easy way at any given time for the sale rep to know how they are performing, then think of a different measurement. Picking measurements that are easy and readily available adds clarity to the plan.
As a startup, your compensation strategy must be structured to best meet your unique business circumstances. The sales incentive plan can be a useful lever to scale and grow by motivating your people to bring in revenue and cash. Taking the time to design and deploy an aligned sales incentive plan will not only help to deliver aligned outcomes, but also to attract and retain top performing sales talent. Here at Allied Legal, we help our clients consider the legal, commercial, and sales aspects of their incentive plans. If you want to design and implement a compensation plan for your startup, give us a call on 03 8691 3111, or send us an email at hello@alliedlegal.com.au for a consultation.
