• The Channel and Sales Compensation (Part 4 of 4)

    Sales compensation is one of the most important tools a company has in developing a channel. The channel (called resellers in this article) needs the company sales force (either the direct or channel only focused) to teach and jointly sell, especially early on. 

    As they begin to introduce the company to their clients (your new source of leads), the reseller wants to make sure they will be paid appropriately. Deals stolen at the last minute either by taking them direct or by another reseller deep discounting in the last hour, quench relationships and cause the reseller to divest. The company is then left wondering why the reseller is disengaging after the initial enthusiasm.

    Time spent understanding and crafting compensation that generates desired engagement behavior will be highly returned with results. Books are written on compensation, so what this article will highlight the basics and the expected outcomes.

    The most common phrase in compensation is “Channel Neutral.” Most companies use this phrase to mean the company sales force (called Direct Sales) is paid the same percentage on gross receipts regardless of the channel. What the channel really wants to know is the Direct Sales is paid the same amount, regardless of the channel. This removes conflict. Here are the common scenarios and strategies for removing conflict.

    Scenario 1: Direct Sales is paid 10% on gross receipts to the company regardless of the channel. Let’s say a deal booked directly with the company is $100,000 with 20% discount, net to company is $80,000. The Direct Sales is paid 10% of gross, so $8,000. If this is booked through the reseller, and the reseller discount is 35%, gross receipts are $65,000 and the commission is 6,500. On a $1.5M quota, this could be up to $28,500 less in commissions, enough to change behaviors. The Direct Sales may not engage the partner or work to develop them in the market.

    Scenario 2: The company has a large OEM or distributor relationship. It is not uncommon for these discounts to be in the 50% range or more. So the Direct Sales for the same transaction is paid $5,000. This is not Channel Neutral when there is a difference of 40% in compensation. The Direct Sales will alter their behavior unless protections are put in place.

    Scenario 3: The company has OEM relationships and resellers. Some of the resellers have strong business ties a large OEM. The OEM’s sales reps are paid on your product and they are motivated to get the reseller to sell the OEM’s version of your product at the expense of the reseller booking it directly with the company. The company Direct Sales rep is paid $5,000 for the transaction. This is acceptable if the OEM originated the deal, but what if this is a reseller lead? The reseller is paid just the same, so they are most likely going to book the deal with the more powerful partner.

    Scenario 4: Direct Sales is paid only on sales they book and a company Channel Sales force is put in place paid only on reseller gross receipts. In this scenario, the company typically defines the market the resellers will play in, separate from the Direct Sales. This could be size of company, verticals or geographies (very common for international expansion)

    Scenario 5: Company has a channel only strategy. There are no direct sales reps or directly booked revenue. In this situation, there is minimal if no conflict.

    So what to do?

    1. Implement deal registration. Once a deal is registered and accepted it will only be booked through that channel. Alternatively only registered channel gets the deeper discount on the deal. The non registered partner can still book the deal, but only at a much smaller discount.
    2. Require Direct Sales to book a percentage of their revenue through the channel, tied to bonuses or compensation kickers.
    3. Compensate the Direct Sales for reseller deals at the average gross receipt for direct deals. Uplift their quota to compensate for the difference in gross receipts. So in scenario 1, instead of a 1.5M quota, the goal would be approximately 2.0M. Compensation will vary according to the percentage of total quota attained. For instance 8% is paid out below 750K in attainment and 10% up to 1.5M and 12% up to 2.0M.
    4. Do not pay Direct Sales on OEM deals. Resellers in turn would not gain a top level status (resulting in deeper discounts, MDF) based on revenue through the OEM.

    Bottom line, follow the money. This will dictate the behaviors. Play through the various scenarios that could happen to determine up front how your company will operate. This will save you a great deal of head aches when you are in the midst of the deal.

    This is the last of a four-part series of articles on channel marketing by Camberley Bates, Managing Director at Evaluator Group.

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