What's a typical sales compensation for professional services firms?

We are looking at hiring our first sales person (who is not one of the partners) so that we (the partners) can focus on building the business instead of Lead Generation/Qualification. The question that we are coming up with is how do we fairly compensate a sales person. I have read a lot of product based companies views on how do do this, but professional services is a different animal and we just want to make sure both sides feel good with the arrangement's.

We have thrown around internally different base + commission structures and the +/- of having a dangling carrot using a quota (higher commission rate once you go over quota).

It depends on several factors; here are several ideas, in no particular order.

1) Sales cycle: if the sales cycle is long then you need to lean more on the base. If the sales cycle is short, then you can lean more on commission.

2) The price point: the higher the price point, the better in terms of paying on commission but usually a high price point leads to a long sales cycle (see above)

3) Competition: how do competitors in your space pay their sales people. That'll give you an idea of what people expect.

4) Experience: not so much in terms of time-spent but in terms of contacts established and the size of the rolodex.

5) Draws and bonuses: the security of a base for the sales guy with the benefit of variable costs for the CFO.

6) If at one point sales becomes a cost center, you're in trouble.

7) Pay for performance: not just sales closed but also for intermediate goals. Calls made, prospects in the pipeline...

8) Residuals. Great if your business model has a recurring revenue component. Helps to keep good sales people around. Make them gradually decrease over time or conditional on some minimum.

9) Sales assistant/intern: as a perk for the sales person you're looking to recruit, providing a person feeding the pipeline by might be a big bonus.

10) If they suck at the beginning, they're not going to get better over time. Start with a trial period and don't let feelings get in the way: if they suck they'll prevent you from hiring good ones later. Nothing long term until you're sure.

11) Good luck!

The ratio of base pay to incentive pay is going to range from around 60% base to 80% base. As a rule of thumb, the younger the company the larger percentage will be allocated to incentive. (A larger, more mature company will feel that more of the sale will be attributable to the brand and less to the individual skill/hustle of the individual account execs.)

For the incentive pay portion, you have four options that you can mix and match.

1. Revenue Signings. Similar to most product companies, commission is paid in the quarter or month that the business is signed.
2. Revenue Recognition. Commission is paid when the work is billed (or sometimes paid) by the client.
3. Gross margin recognized. Commission is paid based on the revenue recognized, after the costs of labor.
4. MBO (management by objective). In other words incentives not based on revenue, but some other measurable goal. Such as getting a specific contract, getting a meetings for the partners with clients, handing over a number of qualified leads, getting a specific customer satisfaction score with clients.

Most companies that are purely time and expense (i.e. billable hours) based will lean towards revenue recognition. In a billable hours model, the amount signed may not always match the actual revenue. For example, the project may finish early. Or the customer may cancel the contract early. Or some contacts might even be open ended. You wouldn't want to pay the entire commission for a $5 million deal only to have the customer cancel after only $250K has been billed to the customer.

Companies that lean towards fixed price contracts are more likely to incorporate elements of #1 and #3. I haven't seen #3 (gross margin) that frequently, but it can be very effective. In a fixed price situation it discourages the account exec to always be trying to get the partners to sign off on lowball bids. And encourages the rep to deliver quality deals. Deals that have poor contracts, poor scoping, or poorly priced will not help his commission.

Companies with very long sales cycles may be forced into MBO based plans, especially for new reps, OEM reps, or inside sales reps. No one particularly likes them (companies or reps), but in some circumstances you have no choice.

Regardless of the incentives you also have to decide how to handle how to handle new reps. Unless you have a well established pipeline of deals he or she can walk into, you will want to establish a draw. Unrecoverable draw is essentially a guarantee of commission. For example if you have 100% unrecoverable draw for a quarter you will pay him 100% of his incentive pay in the first quarter even if he sells nothing. But if he sells more than his quota, he gets paid as normal. A recoverable draw is essentially an advance. If you have a 75% recoverable draw for a quarter you will pay him 75% of his incentive pay even if he sells nothing, but he will "owe" you the difference. A typical arrangement might be one quarter of 100% unrecoverable draw so he can build a pipeline, plus one quarter of 100% recoverable draw so he can have a steady paycheck while the first deals came in. If you are paying incentive based off of recognized revenue you might consider extending the recoverable draw period. But don't let yourself get in a situation where the rep gets too far underwater with recoverable draw. If it's not working out, let him go. Otherwise it is too demotivating for everyone.

If I was in your shoes, and without knowing the details, I'd probably put together a 70/30 plan with 70% of incentive based on recognized revenue with 30% of incentive based on recognized gross margin. I'd like to have the account exec on even more incentive pay and even more gross margin, but since whomever you hire will be taking a risk on you it will be good to show some confidence.

Also be sure to consider quota. A rule of thumb I've seen is to not let your sales overhead get over 5%. So take your expected fully loaded cost for your sales team, multiply by 20 and set that as your minimum annual quota. There are other factors for setting quota, of course, but that rule of thumb will get you started.

You also ask about "dangling carrots" for exceeding quota. These are generally called "accelerators" and are not a bad idea. However, in comparison with a software product company (where gross margin is near 100% and all sales above the quota are pure profit) you may want to have smaller accelerators. The margins in services are smaller and it is harder to handle large spikes in sales.

Disclaimer: It's been a long time since I've worked on a comp plan for services sales execs, and a lot is going to depend on the amount of gross margin you are able to maintain. The larger the gross margin, the more you are going to want to leverage your compensation plan.

How ever you choose to compensation remember that all employees need to have their base costs met. If they are not met and the employee is going backwards they will loose interest and motivation. If they are living on the draw of a future with

In a startup environment it is important to recongnize that there is not a proven scalable replicable sales model yet.

My experience is that in most business -- especially startup's -- that the sale person is given too much credit when things go well, and far to much blame when things don't go well. Besure that you recognize that the sales person is a member of a team that is

Another Way to Do it. I reccomend that you understand your new employee's base need and match your base to it. Then motivate the entire team through shared compensation of meeting milestones and benchmarks. Either the sales person will be working out and earning you money or their wont. If they do you will cover their nut. If they don't you will be letting them go.