How should you pay salespeople in a services company?

Why is a sales pay plan the loudest message a leader sends?

A pay plan is the loudest message a sales leader sends. Sellers read it closely and act on what it pays for.

Ian Larkin studied a large enterprise software vendor that paid a higher commission rate as a seller's sales climbed. Sellers timed when deals closed to collect the higher rate, and agreed to lower prices in the quarters when closing paid them more. Larkin estimated the mispricing cost the vendor 6 to 8 percent of revenue (Journal of Labor Economics, 2014). The study covers a single software vendor, and the figure is the author's estimate. The behavior it describes is worth watching for anywhere sellers set price. In a services company, look for discounted bids bunched near the end of a period. Margin given away in a bid stays given away for the life of the job, and on an agreement it can carry into every renewal.

6 to 8%

of revenue lost to deal timing and mispricing under an escalating commission plan.

Larkin, Journal of Labor Economics 2014 · one software vendor

What questions shape a sales pay plan for a services company?

Six questions, and one that sits under all of them.

What does the business most need sellers to do this year?

Start here, before anyone opens last year's plan. The answer should come from the business plan the owner or sponsor signed, whether that means more RMR, the recurring monthly revenue from agreements, or better project margin. Listen for one or two priorities said plainly, and for whether the pay plan was written after that answer or before it. WorldatWork, an association of compensation professionals, surveyed 693 compensation and HR professionals across industries in June 2022 with the sales consulting firm SalesGlobe. Of the 447 who answered, 71% said their plans used two or three performance measures. Every measure you add competes for the same seller's week.
Does the plan pay the same for a recurring agreement as for a one-time project?

A $60,000 retrofit and a $60,000-a-year maintenance agreement look alike on a bookings report. The project ends when the work is done. The agreement renews, and its inspections find the repair work that keeps a branch busy. Listen for how the plan treats each one and why, in terms finance would sign. One field study shows the risk. When a pharmaceutical firm moved sellers in 458 territories from a quota bonus to a commission, productivity rose, but sellers neglected work that did not directly show up in sales more than they had under the bonus (Kishore and colleagues, Journal of Marketing Research, 2013). The study covers a single drug company. Effort followed what the plan counted.
Who is paid when an agreement renews, and what happens when one is lost?

Renewals are where recurring revenue proves it recurs. If nobody's pay moves when an agreement renews or lapses, nobody owns the renewal. Listen for one name per renewal and a written rule for losses, including whether commission already paid comes back. Ask, too, what happens to a seller's agreements when the seller leaves. In New York, the written terms for a commission salesperson must describe how pay is calculated, how often any recoverable draw is reconciled and what is paid when either side ends the employment (Labor Law section 191). Your state's rules may differ.
Does the plan pay on revenue, margin or collected cash, and does that match how we make money?

In services, margin is set in the bid, so ask who sets the price. WorldatWork named revenue the most common measure across sales roles in 2022. Among field sellers who sell to current customers, 58% of plans used revenue and 27% used gross profit (121 responses). A University of Mannheim research summary of 338 business-to-business suppliers, published in 2012, found that where salespeople had authority over prices, firms were more profitable when those salespeople were paid on margin. Then ask about cash. If the plan pays on billing, a job that is never collected still paid the seller. Listen for finance and sales giving the same answer.
Can every seller explain how they will be paid next quarter?

A plan sellers cannot explain cannot steer what they do. Ask a few sellers to walk through their pay on a bid they are working now, and compare their answers with finance's. Some states put this in law. California Labor Code section 2751 requires a commission contract in writing that sets out how commissions are computed and paid, with a signed copy for the employee and a signed receipt from them. Since 1 January 2013 it has covered every employer with commission sellers working in California, and its definition of commission leaves out some bonuses. None of this is legal advice. Review your plan documents with employment counsel in each state where your sellers work.
Which deals paid the most commission last year, and were they the deals we wanted?

This question tests the plan against its own record. A good answer arrives with job margin beside each deal and, for agreements, whether they renewed. Listen for surprises. A heavily discounted project at the top of the list, or an agreement that lapsed at its first renewal, shows what the plan rewarded.

The question under all six

"What is our pay plan teaching sellers to do this quarter?"

This sits under every other question. Sellers learn the plan from their paychecks faster than from any kickoff deck, so the honest answer comes from what they did last quarter. If that answer differs from what the business needs this year, the plan is the place to start.

What are the signs a services sales pay plan is working?

Good signs

The sales leader and the CFO describe the plan the same way.
Every renewal has an owner whose pay moves when it renews or lapses.
Sellers can price a bid and tell you what it pays them.
The plan changed when the business plan changed, and someone wrote down why.

Warning signs

The biggest commission checks went to the lowest-margin work.
Agreements renew or lapse and nobody's pay changes.
Discounts bunch up at the end of the month or quarter.
Sellers answer "it depends" when asked how they get paid.
The plan document expired, and nobody issued a new one.

Case study Fictitious numbers

A sponsor-owned commercial plumbing and HVAC services company pays its 18 sellers on bookings, with the same commission on every dollar booked. Last year the plan paid out $640,000. One-time projects earned sellers $480,000 of it. New service agreements earned $160,000.

The CFO ran the same year by gross profit. Projects produced $1.8 million. Service agreements, counting the repair work their inspections generated, produced $2.4 million, for $4.2 million in total. The work that produced more than half the gross profit earned a quarter of the commission.

Commission paid

$640K

same rate on every dollar booked

Gross profit

$4.2M

counting the repair work agreements generate

Service agreements

57%

of gross profit, on 25% of the pay

Where the pay went, and where the profit came from

Commission paid$640K

$480K

$160K

Gross profit$4.2M

$1.8M

$2.4M

One-time projects
Service agreements

Sellers had read the plan correctly. A $90,000 retrofit and a $90,000-a-year agreement paid the same.

Sellers had read the plan correctly. A $90,000 retrofit closed in three weeks and paid in one check. A $90,000-a-year agreement took two months to close and paid the same. When an agreement renewed or lapsed, nobody's pay changed, so renewals waited until a customer asked.

The sales leader took both breakdowns to the next plan review with the CFO and the sponsor. The conversation moved from what rate to pay to what the business needed sellers to do next year, and who would own each renewal. The new plan was written after those answers. Before it went out, the leader asked a few sellers to explain it and rewrote the parts they got wrong.

FAQ

Should service agreements pay more commission than projects?

There is no single right answer, and rates belong to your own economics. Start with what each is worth to the business over its life, including the repair work an agreement's inspections generate, and with what the business needs from sellers this year. Then make sure the plan says plainly how each is treated. A plan that is silent leaves sellers to work it out from their paychecks.

Does a sales commission plan have to be in writing?

In some states, yes. California Labor Code section 2751 requires commission contracts in writing, stating how commissions are computed and paid, with a signed copy and a signed receipt. New York Labor Law section 191 requires written terms signed by both sides and kept for three years. If the employer cannot produce them when the state labor commissioner asks, the seller's version of the terms is presumed correct. Check your own states with employment counsel.

What do most companies base sales commission on?

Revenue leads. WorldatWork's 2022 sales compensation survey, with 693 responses from compensation and HR professionals across industries, named it the most common measure across sales roles. Bookings came second and gross profit third for field sellers. The survey is not specific to services, sample sizes vary by question, and respondents could select more than one measure.

What is a clawback in a sales commission plan?

A clawback is a plan clause that recovers commission already paid when a deal cancels or a customer does not pay. In a services company the cases to cover include an agreement that cancels early and a project invoice that goes unpaid. Write the rule into the plan document before you need it, and have employment counsel review it first.

How often should you change a sales compensation plan?

Change it when the business plan changes, and say why. In WorldatWork's 2022 survey, 49% of organizations said they were planning to revise their approach to sales compensation in the next 12 months (410 responses). One legal note from California. Under Labor Code section 2751, when a commission contract expires and both sides keep working under it, its terms are presumed to remain in effect until superseded or employment ends.

How should you pay salespeople in a services company?

Why is a sales pay plan the loudest message a leader sends?

What questions shape a sales pay plan for a services company?

What does the business most need sellers to do this year?

Does the plan pay the same for a recurring agreement as for a one-time project?

Who is paid when an agreement renews, and what happens when one is lost?

Does the plan pay on revenue, margin or collected cash, and does that match how we make money?

Can every seller explain how they will be paid next quarter?

Which deals paid the most commission last year, and were they the deals we wanted?