Answer by Dan Walter (original question on Quora)
Great question, and one that is getting more attention lately as more sales forces are evolving from selling things with a quick hit of revenue, to selling services with long tail of revenue.
Traditionally sales people have been viewed as “coin-operated”. This has meant they sell something, the company gets paid fairly quickly and the sales person gets their share. There may have traditionally been a long-term component, but it was small… relative to annual, or even shorter, incentives.
Evolving to an “annuitized sales model” requires taking a new look at sales compensation. A $100,000 sales that will be paid over 5 years requires a different pay program than a $25,000 sales that is paid this quarter.
Stock options and other forms of equity compensation are designed as mid-term and long-term incentives and retention devices.
- Do you sales processes take a very long time? Think in terms of years, not months. If so, stock options may be a good tool.
- Does your sales process include selling a small level of services today with the goal of building the level of services over a long period of time? If so, stock options may be a good solution.
- Does a sale at your company take months or years to get fully paid (ex. 3 years contract paid in equal monthly installments)? Stock options may also work in this scenario.
- Are your “sales people” really some hybrid of marketing, relationship manager and sales pro? If so stock options might make sense.
- Are your sales people also professional services people. Essentially consultants who are “rainmakers”? This can be a great time to use stock options.
- Are your sales people selling “stuff”? And, are they paid a good commission on that stuff, based on some level of profit margin to ensure the company also gets its share? This may NOT be a great place to use stock options, unless it is a bigger piece of your culture and compensation philosophy and used as a form of communication to tie everyone to common goals.
Figure out where you are (or where you want to be) relative to the information above. Then take a look at the answer provided by Jason Lemkin in this thread as it also has some important considerations.
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