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.
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?
Subscribe to my weekly podcast In the Arena.