Compensation plans affect your sales representatives' motivation to close sales. Most plans combine base salary and commission, with the primary emphasis on the latter since it is directly tied to how many accounts the representative is able to win. However, sometimes this isn't always the best option. Salespeople will sell what they know, as opposed to what you want them to sell, in order to maximize their near-term income.
This is especially important for companies transitioning into the managed IT services space. As an MSP, you need the right compensation plan to yield the best results from your sales team. If your compensation plan is executed incorrectly, "salespeople will continue to promote traditional IT products and services over managed services". A successful plan is one that aligns the business interests with the interests of the sale representative. The Quick Start Guide to Managing a Managed Services Sales Organization, published by CompTIA, outlines three ideal methods to structuring compensation plans for MSPs. The three structures are up-front, residual, and “pure commission.” In this blog post, I'll break down the three different compensation plans, in order for you to determine which plan works best for you and your business.
This compensation plan is made up a of a large up-front payment based on the size and term of the client's agreement, which is also referred to as a front loaded model. This approach is advantageous because it discourages salespeople from selling traditional IT products and services. The near-term reward for selling managed services is far greater. In this approach, the commission is paid before it is technically earned. This method also incentivizes sales executives to become "hunters" and specialize in finding net new clients.
The residual compensation plan pays out sales representatives' commissions as they are earned. It's also known as the month-to-month model. Each month, the sales rep receives a small payment for the length of the term agreement. This allows you to match the expense of the commission to the revenue of the sale. There is a downside to this approach, however. Usually commission is earned slowly, which decreases the sales reps' motivation to sell managed services. With this method, the sales representative is now a "farmer" and more inclined to continue cultivating existing client relationships to protect the revenue stream. Unlike the first model, they're not incentivized to acquire net new clients.
This is the least common compensation package among large and more successful MSPs. The model offers no base salary, but commissions are double the rates in comparison to the first two models. Some MSPs might believe this to be the best method because it provides the greatest incentive for salespeople to sell, since they have no base salary to fall back on.
The decision comes down to you and your business's needs. Do you need to grow your book of business? Is it your priority to keep your larger clients happy? One way to decide is to find the source of your revenue. Does 75% of your revenue come from your top 10 clients? Is so, adopting a residual compensation structure likely makes the most sense. The truth is as you grow, you will need to find a mix that works for your sales team. Most of the time account executives act as hunters by focusing on gaining new business and generating new leads. On the other hand, your account management team can play the part of the farmer and nurture existing accounts by strengthening client relationships.
What works best for your business? Are you made up of hunters, farmers, or both? Leave a comment below!
Want to know which compensation plans other MSPs are using?
Have you considered using other incentives to motivate your sales team? Here is a spread of different strategies MSPs in the US use to encourage their teams!
Here's another suggestion from a Reddit user who provides an excellent way to motivate any of your employees, including your sales team!
Managing sales teams can be tough! Maybe you're just getting start and building your team or are unsure of how to best prepare and train your reps. CompTIA's, Quick Start Guide to Managing a Managed Services Sales Organization, is a great place to get started. And be sure to also check out our own sales guide: