In this session, we will discuss how to build compensation plans for the sales function inside a boutique pro serv firm. We will share how the comp plans need to change as a firm migrates from founder-led sales to a part-time sales force to a mature fully function commercial sales team. Learn how to figure out how much to pay, the proper split between salary and commission, the measures to pay commission on, and the costly mistakes to avoid.
Greg Alexander [00:00:10] Hi, everyone. This is Greg Alexander, the host of the Pro Serve podcast, brought to you by Collective 54. The first community dedicated to founders of small service firms that are trying to grow scale and someday sell their boutiques. On this episode, we’re going to talk about designing a sales compensation plans inside of the boutique professional services firm, which is quite an interesting challenge. And we have a member with us today who’s an expert in this very area. His name is John Carney. John. Please introduce yourself and your firm to the community.
John Kearney [00:00:54] Great. Thanks for having me, Greg. Again, my name is John Kearney. Happy to be a member of Collective 54 and I am the founder and CEO of a company called The Buyers Way, or a go to market advisory focused on helping CEOs and growth leaders consistently grow revenue. So the buyers way is a methodology. It’s a book that is out and it can be found on Amazon. And it’s a methodology for ensuring go to market Teams are aligned to how buyers think, act and feel. It does this by aligning a story, the story of our buyer as a hero with a revenue plan. So it’s got both of the emotional ties to it as well as the hard numbers driven approach to it. So that’s a that’s a little bit about the firm.
Greg Alexander [00:01:42] All right. So let me set this up for John and for the audience. So we’re talking about designing sales plans and for the boutique purchaser firm owner, what ends up happening is you’re the three lifecycle stages of a firm growth scale. And exit is what we talk about in our framework. And in the growth stage, there usually isn’t an independent commercial sales organization. Selling is done by the founders, and it’s very much a collective activity of many people. Then you graduate out of the growth stage, you go into the scale stage, you’re probably in year six through six through ten, and the firms of significant size at this point. And you want other people other than the founders and the partners to be selling and bringing in work. And that can be either through expansion revenue of current clients as well as bringing in new clients. So now all of a sudden you have these people who are full time employees doing something else and you’re adding the task of selling to them. So how do you pay these people? As you can see, it gets really complicated. Then as you move into the exit stage beginning in year 10 or 11 or so here, you want, you know, a fully developed sales organization. These are non billable resources who wake up every day thinking about doing one thing, and that’s generating revenue. And in that instance, designing sales comp plans is pretty straightforward because the role is pretty straightforward and you know what type of behavior that you want to incent. But, you know, that’s well down the road, you know, two thirds of the way through the entrepreneurial journey. So it becomes much more difficult to do this in the growth and scale stage. So it’s that as a context that I want to have this conversation with. John. So, John, let’s dive into that first step of the lifecycle stage of a boutique, the growth stage. So maybe start with the fundamentals of of sales comp. Like is there a set of best practices or an easy to understand framework or methodology that one can follow?
John Kearney [00:03:42] Sure. Yeah. I mean, especially in that in that first phase, you know, there’s a few things that, you know, those, those founders and founders to be our partners, to be rather really care most about, and that is equity. And can they sell enough to the point where you feel comfortable as a founder to share your equity with those that are contributing, you know, from a sales and growth standpoint? And that should take some time. A lot of times, you know, you’re bringing in, you know, potential partners that you can help you in that area. And they’re what they care most about is, you know, the long term future. So so of course, there’s always the equity side of things from a compensation standpoint. I think a few things to keep in mind are, you know, to incent upon profit margin to keep it simple, to have no cap. You know, I think it’s the revenue side is obviously critical to growth, but we want to make sure we’re selling profitable opportunities, especially in professional services where, you know, the people side of things is such a big component of of the cost here. So we want to make sure that we’re not just selling any deal, but that we’re selling the right deals in a profitable way. So I think when it comes to those two founders, to potential partners, as you’re trying to get through those first few years, those are a few of the standard things to think through.
Greg Alexander [00:05:13] So let’s talk about incenting on margin, because not a lot of our members are doing this. They’re paying incentive comp to people performing the sales function on revenue. And the reason for that is most of them are first time founders and more often than not they came to us from a product company and product companies pay on revenue. They don’t pay on margin. So their that’s their frame of reference and they think that’s the way to do it. But in services, to John’s point, you know, especially for you, the founder, you know, as they say, you can’t eat revenue, you can eat profits. Profits is what puts steaks in the refrigerator and pays the bills. So therefore, aligning the compensation plan to. Profit versus revenue is really hard. So, John, this concept of on target earnings, the split between salary and variable and then tying the variable to a small number of measures, one of which we just talked about regarding profit is is essential. So how does a founder determine Otti or on target earnings what somebody should make in a given year?
John Kearney [00:06:21] Yeah. So now I think a few of the key things are what what’s market based pay you know what what can they get elsewhere and what is the entire OTB include like again there could be some equity involved in that calculation. But I think, you know, obviously we need to know what we’re competing against in the market and what the long term equity options are. You know, some folks are going to be willing to, you know, take substantially less and potentially work on 100% commission if that is their intention is is to enter a partnership track, you know, coming in, eating what they call bringing in clients from day one in order to hit that. So I think that’s you know, that’s a big a part of that is, you know, a majority of that the compensation being tied to to the variable side of things, as you know, especially as cashiers is coming in the door and we can compensate a little more on the on the salary side. I think getting to a 5050 split where, you know, we’re always going to be incenting that performance and setting that equity based on that variable. But again, without a cap. So if we if you continue to perform and hit those profit goals, then, you know, there’s there’s endless potential there. So I think, you know, especially getting in early, you know, finding the right people that are going to hustle for you, that are going to help you grow this and are willing, you know, in showing that they’re willing to invest early in order to be a part of that reward at the end. You know, I think that’s what, you know, one of the big important things to be focused on with those that are in those early days.
Greg Alexander [00:08:00] Yeah. All right. So let’s progress into the scale stage, you know, so now, you know, I’m a I don’t want to say a mature firm, but I’m certainly not worried about going out of business. I’ve got enough working capital in the business to start, you know, investing in sales and marketing. But my approach here is going to be to, you know, get my, quote, delivery people to do some selling on the side and incenting that. It can be really challenging because you’re asking people to divide their time, divide their labor. So what type of items as it relates to sales should have found to be thinking about in that context?
John Kearney [00:08:40] You know, so I mean, again, it’s going to here is going to depend on the role and how you set up. Will Well, first call a sales team and then a wider revenue generating team. And then if we’ve got a new logo sales team, we’ll all they’re out there doing is pounding the pavement and bringing in those new logos. And then typically we’re going to see that account management team, which is where we get that blend of delivery and sales. And so, you know, we have to consider those separately in terms of, you know, how to compensate them. On the new logo side, it’s pretty straightforward. It’s a commission based role and we want them going out and finding those new customers. They are salespeople. They’re ready to be compensated in that way and that’s what they’re here to do. But that sales team is not the only part of your revenue generating engine, especially we’re not to your point, they’re not going to we’re not at risk of going out of business. But we still need to grow and we still, especially if we want, you know, our team to stay intact as it is, we need that team to, you know, everybody on the team to be thinking about how they can put on the revenue generating hat. And so delivery resources who depending on the type of professional services firm we’re talking about, may be used to having variable pay and having some sort of revenue gathering component to their compensation. There’s plenty that don’t. However, what we what we try to to train on and to make sure that everyone that touches the buyer has an impact on the revenue. So everyone that goes out and delivers is a part of this revenue generating engine in some ways. And so, you know, the metrics that we that we hold them to and the measures that we hold them to are again going to vary by role. But of course, you know, there’s there’s retention, there’s can we keep these clients coming back? Can we sell them more and increase the book of business that we’re doing with them? But even short of that, if you just think about delivery resources, can they generate referrals within the account? Can they go out and find more people within the account that we don’t know today, potentially new buying centers potentially within this buying center? Can we find can we send referrals back to the sales team? Even if these delivery resources don’t like to close, can they find people and they find evidence that a problem, a pain point that needs a painkiller exists? Delivery people are really, really good at finding problems that exist within a. Client. So can we train them to find that evidence? Can the account management team, the sellers? Can they say, Here’s five hypotheses I have for growth within this account? Please go find me that evidence And if you can find me that evidence, you know I will compensate you on that and bring you into that. And then, of course, you know, any delivery resource making, you know, putting them in a position and this is, you know, I’ve been in sales. I’ve been in delivery. And so my favorite experiences are when, you know, I’ve been, you know, on the delivery side and have, you know, grown those accounts and been compensated for those. You know, even as a delivery free resource, you know, we all have to if we want job security, you know, showing that we are on the revenue side of the equation and not simply a cost is imperative to our future growth. So it’s it is about finding those things, referrals, finding evidence, you know, growing your network. That is something where we think about social reach. We think about in various ways that any resource can get the message of the firm out more. You know, can we can we compensate or put specs or put targets around things like how many subscribers do we are we generating into the newsletter? How many connections do I have on LinkedIn? So when I share the firm’s message, I’m getting out there to the widest possible audience. So those are little things that anyone in the delivery side and even within, you know, customer success, that things of that nature where we can, you know, be looking for anything that drives value for the client, any touchpoint and finding what that is and compensating for it.
Greg Alexander [00:13:04] So earlier we were talking about new logo acquisition salespeople. You suggested paying them commissions. This aspect of it, which is on the account management side. Do you also suggest commissions or is it more of a bonus structure?
John Kearney [00:13:21] I think for the account managers there can be a commission component of that. I think there I don’t like more than two measures, but I think having one based on commission for those account managers is important, you know? And then, of course, you know, the bonus and especially on the account management side and knowing what your book of business is and when renewals are falling off, you know, bonuses can help simplify things at certain points. But I do think having a commission for that account management side as one of their measures is, is a good practice.
Greg Alexander [00:13:57] But if they’re not closers, how do you pay commission?
John Kearney [00:14:02] Well, in this case, what I’m referring to, these account managers do end up closing. Okay.
Greg Alexander [00:14:07] Got it. Yeah. Yeah, I was The upsell.
John Kearney [00:14:09] The renewal. Yeah. Yeah.
Greg Alexander [00:14:11] Okay. Got it. All right. And then you suggested on the new logo side, roughly a 5050 split between salary and commission. You know, when the firm gets to a certain level of maturity on the account management side, is it the same split or is it different?
John Kearney [00:14:26] No, I’d say it’s more 8020 depending on how risk averse you are. But I would I with these types of roles, I wouldn’t go I wouldn’t reduce the variable and any further than that because we do want, you know, all of these folks to realize that they are revenue sharing resources. But I’ve also seen and understand a lot of organizations want to over and some even still and so it could be 7030 but I think 8020 on those types of roles is standard.
Greg Alexander [00:14:53] Yeah. And you mentioned market based pay. So if I’m a member listening to this and I agree with that principle and I need to find out what the going rate is for a new logo repping my geography or account manager, my geography. Any resources that you would point a founder to?
John Kearney [00:15:11] I mean, I think Glassdoor comes out with some information, LinkedIn comes out with some information. Sometimes you have to pay a little bit for for that information. But I think there’s enough out there in any given territory, in any given location where you can get to a sense of what that is. I think asking other members of a collective like this is one of the main benefits of a collective like this and saying, what are we you know, what is what are we what is everyone else in this market seeing or in this industry? So I think, you know, going out to your peers and maybe not your competitors necessarily, but others within the professional services firm and find out what they’re paying. But I think there is enough data out there to at least get a range. Yeah. Attract the candidates and then, you know, negotiate with those individuals and find out if if they’re worth, you know, the side of the range they think they’re on.
Greg Alexander [00:16:04] All right. Well, very good. Well, we’re out of our time. I mean, we try to keep these podcast about 15 minutes and then John will be on the one hour role model Q&A with the with the members and members can ask more detailed questions directly of him. But so this is the first time that you’ve been on our podcast. So welcome to the collective. Thanks for making a contribution back to the collective knowledge and we look forward to your upcoming session.
John Kearney [00:16:26] Great. Thanks for having me and looking forward to that session and meeting with more folks.
Greg Alexander [00:16:29] All right. All right. So three calls to action for those that are listening. You know, if you’re a member, attend John session. Keep your eyes open for the meeting. Invites coming shortly. If you’re not a member, you want to become one go to collective 54.com and fill out an application. We’ll reach out to you and if you’re not quite ready for that be You just want to learn more about the types of things we discuss. Check out my book, The Boutique How to Start Scale and Sell a professional services firm, which you can find on Amazon. But that’s the end of the show. Until next time, I wish you the best of luck as you try to grow scale and sell your firm.