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How Much Would You Pay for That Client? (A Note to the Entrepreneur)

How much would you pay to acquire a major client, your dream client?

Some entrepreneurs (and some business leaders) struggle to pay salespeople for the results that they produce. It’s not that they don’t have the money to pay the salesperson for their results. They’re just unhappy paying salespeople anything over some arbitrary number that they believe is a reasonable total compensation. You see this in capped commission and bonus plans.

Over the last two weeks I have heard from two salespeople that both have a capped commission plan. One works for an entrepreneur that is philosophically opposed to paying anyone over a certain amount, believing no one is worth “that” much money. He isn’t willing to pay more for a greater result not because he doesn’t want the result, but because he doesn’t believe the person deserves it. For him, a salesperson cannot make over a number he has set in his mind, regardless of what they produce. If they were paid more, it would be too much.

In the second case, the entrepreneur didn’t really understand her client acquisition costs. She made a deal that made sense, and then decided later that she was unhappy paying as much as she needs to acquire clients. She still wants new clients—she just wants to pay the salesperson less to acquire those clients. This is her right as the business owner. But it wasn’t a problem until the salesperson’s compensation reached a certain number that feels is too much to pay one person.

In both cases, compensation wasn’t a problem until it reached the number that the business owner felt was unreasonable to pay any employee. In both cases, the business owners would gladly write the same commission check to a different salesperson for acquiring the client —as long as that salesperson wasn’t making above their arbitrary threshold.

A variable compensation plan is designed to protect the company from overpaying for salespeople that don’t produce results while rewarding salespeople that do. The penalty for non-performance is the loss of commission or bonus. Why then impose a penalty for a performance well? Why punish them for doing better than you imagined possible?

Capping bonus or commissions causes other problems, but one of the most important is the timing recognizing revenue. If the salesperson can win a deal but has already reached their cap, they sandbag the deal and close it when they can be compensated for winning it. Who really loses here? The salesperson’s company loses the revenue and profit the new client would have generated. The prospective client loses the better solution. And the salesperson, having earned all that they can earn under the cap, loses nothing (unless the client has to make a move now).

There are some businesses where great salespeople are paid better than sales management. These business are happy to pay for the client to be acquired, and they encourage the salesperson to do more. If you have your client acquisition costs right, there is no reason to begrudge a salesperson earning a lot of money for doing their job and acquiring clients.

Questions

Is there a certain amount of money that no one should be allowed to make, regardless of her contribution?

Should salespeople be allowed to capture some of the value that they create? What about a business? Should a business be allowed to capture some of the value that it creates?

If you would pay a certain amount to acquire an new client, is there some reason that you would pay someone else for winning it to avoid paying someone already highly compensated?


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Comments

comments

  • http://www.datahound.co.uk/ Michael Thrower

    Entrepreneurs forget that all sales people are entrepreneurs in their own right. Capping commission takes the fun out of success for them and ultimately damages their business. The best will walk. The average will just fester.

  • John Millen

    It’s an interesting and sad phenomenon when entrepreneurs claim to be committed to free market philosophy and practices but balk at real free market compensation for their sales people. I think the way to overcome this objection is to point out this inconsistency, since we all strive to balance our public positions and our attitudes with our actions. If it doesn’t work you can always just call them hypocrites and use the free market to find someone who will pay on the downside and the upside.

  • http://twitter.com/GregOrtbach Greg Ortbach

    Great article Paul. I think planning (asking themselves the right questions) is critical here. I too, have seen many companies try to “redo” the deal once a certain level of success is achieved. The truly successful company owners I know are always very happy to pay their sales people ‘more’ for solid performance.

  • AmyMccTobin

    My guess is that in both of these cases, the bad decision maker was never in Sales.  Absolutely insane…. why would your great people do their best if they aren’t rewarded for it, and why wouldn’t they go and look for a better situation?  

    The President of a glorious company I worked with had a theory – it was called the sh*t and the sugar;  when we had a claim, the salesperson paid along with the company. But when one of our guys would pop a million dollar order, he got the SUGAR.  We actually made MORE percentage-wise when we went over a certain number, not less.  And we all prospered.

  • http://twitter.com/sbhsbh Steve Hughes

    This is rule rather than the exception for most companies.  I don’t get it, I never understood why you would want to handcuff someone generating high amount of revenue for the organization.  How many companies ever have the same comp plan yearly.  Generally what I’ve experienced is when a small percentage blow out the number, they are penalized with an unrealistic quota and drastic changes to the plan. It seems to be a crime to have two good years in a row, such that the organization basically doesn’t allow it…Nice piece Anthony

  • http://www.zoomis.com/ Daman Bahner

    I feel like it’s the confusion and disconnect have with personal wealth goals and realizing the more value you create for others (clients, partners, employees) the more wealthy you become.  I think those capping sales compensation perhaps have a closet issue with true capitalism/market economy.  There’s a lot of correlation with the amount of people who Microsoft made wealthy and Bill Gates being where he is.  Seattle is a thriving tech economy largely due to the amount of people who left Microsoft in a financial position to re-invest in a variety of startups, real estate and other ventures.