Clients of DNA325 most frequently ask what motivational scheme we can offer for their sales department or a given sales manager.
Nowadays IT-market is overheated with high-quality products and services, but the main question remains the same: who and how will sell. Where to find an experienced seller, what to offer them for things to work out, and how should the sales department be organized? The question is especially topical for a business that is oriented on the western market.
DNA325 made a thorough analysis of the sales manager market to discover what bonus/motivational scheme works best at the leading IT-service companies. Usually, it is CEO who answers such questions, but we decided to take a different approach and talked to sales managers of different levels from the leading IT-companies to understand their expectations, motivation and level of devotion to work.
As the result of the enquiry we determined the most widespread types of sales managers:
- Fixed rate;
- Percentage without a fixed rate;
- Fixed rate + percentage;
- Fixed rate + percentage + grade system (“on target”);
- Fixed rate + fixed bonus for a sale.
Further we will discuss every motivational system in more detail.
- Fixed rate
An employee is offered a fixed rate with a possibility of its increase based on the successful results of performance evaluation during a long period of time (usually, not sooner than in 6 months).
Cons: there is no reference to financial plan and no interest in increasing the company cash flow. There is no direct motivation to increase the level of sales.
Pros: fixed rate offers the sense of stability.
Works best at: in case of a department head. It allows them to be attached to the high rate and the performance of their department, without a personal sales percentage.
2. Percentage without a fixed rate
It is a fairly common offer, since at a glance it seems that a percentage is enough to motivate the personnel to increase the sales of the company. However, different motivation works rather often: to gain more offers from various companies and keep the level of performance at the cost of the established pool of own clients. In this case, a sales manager is not interested in the high quality of the provided services and does not bear a real responsibility before the employer.
Cons: a risk of a poor-quality customer service that will result in brand problems sooner or later.
Pros: a large workforce without investments on the part of the employer.
Works best at: freelance sales managers who will have similar offers from several companies.
3. Filed rate + percentage
It is the most widespread scheme that proved to be effective for both sides. The major question here is the calculation of the optimal percentage. Should it be calculated from the gross profit (project cost) or the revenue (turnover)?
Judging from the answers of the interviewed sales managers, the most widespread case is a percentage from the gross profit. However, this scheme is often not transparent for the sales manager, because in order to receive the exact percentage from the project cost one needs to know the calculations of the project cost, for example, the salary of the developers. That’s why some sales managers say that this is not a very fair approach because it offers the employer numerous possibilities to cheat, offering false information about the expenses on the project. In case the percentage from the revenue is paid to the sales manager, the employer takes up additional risks, because the project can go off course and bring much less profit than expected.
Cons: a non-transparent scheme for the personnel or a risky scheme for the employer.
Pros: it offers rewards for an employee, and they are proportional to the size of the project.
Works best at: for a linear sales personnel in agencies and outsourcing companies.
4. Fixed rate + percentage + grade system (“on target”)
It also works effectively for both sides. This approach lies in the following: for example, if a sales manager closes contracts for an amount between $5k and $25k per month, they receive +1%, between $25k and $50k, they receive +2%, between $50 and 80k – they receive +2.5%.
Here, as in the case of a fixed rate + percentage, a question of the calculation of the percentage from the gross profit or revenue emerges, and the consequences are similar. Also ,from time to time there will be situations when a sales manager comes upon a small-scale project and will not consider it a high-priority one because of a low percentage. That’s why the management of the company should pay close attention to the maintenance of the strategy of the company. A potentially significant client, who might have wanted to test the company’s performance on a small-scale project, or a client with a famous name, who can be a star in the portfolio, can be missed out.
Cons: a non-transparent scheme for the personnel or a risky scheme for the employer. Sales can tend to miss out small-scale projects.
Pros: provides rewards to the employee that is proportional to the size of the projects.
Works best at: for a linear sales personnel in agencies and outsourcing companies.
5. Fixed rate + fixed bonus for a sale.
A progressive scheme without any attachments to the type of the project, it motivates the personnel well. Here’s an example of the calculation: a project between $5k and $25k – $1k bonus, between $25k and $50k – $2k bonus.
With such a scheme the calculation of a commission from a revenue is a widespread and an acceptable practice for both sides. Sales manager finds such a model attractive because it motivates them to sell big projects. However, as in the previous case, it is possible for a sales manager to lose one’s head and make chasing large-scale projects a primary purpose, putting smaller projects aside.
Cons: sales can tend to miss out small projects.
Pros: provides rewards, proportional to the size of the clients, to the employees.
Works best at: at product companies and service business where the profitability of the projects does not fluctuate much.
When using the bonus system with charging the percentage from the sales, systems of grades and fixed bonuses, companies usually set one or several types of goals in the form of a financial plan:
- realistic (minimally needed for the payback);
- aggressive (providing a certain level of profit to the company, depending on the judgement of the management).
As for the sum of the amount of the bonus percentage, the most frequently met in the outsourcing companies number is 7-10% from the revenue. The percentage depends on the level of the manager and their rate as well. If the company reaches or exceeds the X measure of income during a given period, it will be a good bonus if a business development department receives a bonus in the amount of the percentage from their rate. If we speak about the heads of the department, it is preferred to add 3-5% from the revenue of the whole team. In case more aggressive goals should be reached, the bonus percentage grows 10-15% higher compared to the basic figure. Also, there are cases when a business development department receives 25% from the gross profit when reaching the top rates.
Each of the above-described schemes has its pros and cons. However, one should not also forget about the typology of employees and their strong sides, which should
