Revenue Generators: Putting it on the Line

July 2002 Selling

It is true that salespeople have a lot of self confidence. As a group, they are willing to place a significant portion of their salary at risk and tie their compensation directly to their performance. Also, many high-tech companies have had a bad year and place the blame on sales. I have heard reports of 3/4 of a million dollars spent on a sales team where the firm received absolutely zero revenue in return on their investment. In light of these facts, some companies in the high tech industry are calling for salespeople to work with 100% of their pay at risk. Is this the right strategy?

First, let’s get some industry benchmarks on the table.

While salary information is difficult to freely attain, Information Technology Association of Canada (ITAC) and William M. Mercer have released their 2001 Compensation Survey. Sample results indicate sales representative total compensation in Canada varying from a bottom 10 percentile of CAN $65,500 achieved, CAN $54,000 target, to a top 10 percentile of CAN$ 157,000 achieved, CAN $225,000 target. All groups had a base salary ranging from CAN $40,000 to CAN $100,000.

Some conclusions can quickly be made from this data. First, there is a wide disparity in pay for salespeople in technology. This would correlate with the wide disparity in the complexity of sales, sales cycle, and sales methodology. Second, no group actually hit their target compensation. Further analysis of the sample data reveals that most salespeople came near their target, over achieving and under achieving in about equal numbers, but the top 10 percentile clearly missed their target. Third, each group did receive a base salary.

Second, let’s ask about the rational of putting pay at risk and ensuring a base pay.

Sales and Marketing people do put significant portions of their salary at risk. Why? Because they can take specific actions to measurably affect the performance of the business. Performance based pay avoids the free-rider problem and ties incentives to results. In general, it is good business to make pay performance-based when objectives can be clearly stated and measured.

Why then are sales and marketing people not compensated based upon 100% incentive pay? There are issues of teamwork, control, directives, etc., but let’s move into the finances. There are two significant financial reasons.

(1) 100% incentive based pay places excessive financial risk on the party least capable of diversifying the risk. Individual salespeople cannot sufficiently diversify their income if that income is intended to be tied to the risky investment of effort to produce future outcomes acting on behalf of a single company. Base pay reduces the financial risk by reducing the deferment and uncertainty of income. Companies however can hire multiple salespeople to diversify their risk of having an individual salesperson not achieve their target. Thus, companies are usually in a better position to diversify their revenue risk.

(2) 100% incentive based pay fails to provide sufficient financial incentive to the company to support the achievement of the individual salespeople’s specified goals. When a salesperson develops an opportunity and requires company support in marketing material, technical information, or proposal development, and the company has taken no financial investment in the endeavor, it will therefore loose nothing in not supporting the individual salesperson. Moreover, the company is free to change directions at anytime and there are no guarantees that the salesperson will be compensated for the work performed to date. If however, the company pays a base salary to a revenue generator, then the company has a financial incentive to ensure that that revenue generator has the necessary tools and support to succeed in their role.

Third, let’s do some research and see how the immediate tech community responds to this concept.

If you are participating in the revenue generation engine, this includes marketing people and salespeople, please reply to with your answers to a few questions:
– What is your Role in the Revenue Generation Engine?
– How many professionals work for your employer?
– What percentage of your compensation is incentive based?
– Would you work for your current employer for 100% incentive based compensation?
– Within what percentage did you come within your targets? (+/-)
Results of the survey will be published in an upcoming article. All data which can be used to identify individuals or companies will be discarded and complete confidentiality is promised to all participants.

Revenue generators do put it on the line. Each time they act on behalf of a company, they do it in anticipation of achieving specific goals. They take risks as to who to call, upon which sectors to concentrate, how much time to spend filling the pipe versus managing the pipe, and how to manage existing accounts. But how risky should we expect them to be with their salaries?

The May Report, TECH BUSINESS BRIEFS, July 9, 2002

About the author

Tim J. Smith, PhD is the Managing Principal of Wiglaf Pricing, and an Adjunct Professor at DePaul University of Marketing and Economics. His most recent book is Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures.

Tim J. Smith, PhD
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