Tomicide Solutions, February 2012

About Compensating Business Development People

By Tom "Bald Dog" Varjan


Synopsis

Convenient pay-for-performance schemes (scams) might be easy to administer, but the sad thing is that IT companies don't even realise how much they lose on the profit side of this pay-for-performance nonsense.

It may be a convenient payment structure for ditch-diggers, but for serious brain work like business development, it's a losing proposition.

There is significant research proving that "if you achieve this, then you get that" type payment in knowledge work is a waste of time and a chief cause of talent attrition.

Why?

Because "if you achieve this, then you get that" is the bedrock of entrepreneurism. People who accept it are your competitors. People who want some security in their lives are employees either at your company or at one of your competitors'.

So, if you give your people the "if you achieve this, then you get that" ultimatum, then the vital few, Pareto's 20%, leave your company either for the competition or they set up shop and become your competition.

And you're left with Pareto's 80%, the trivial many, that is, the bottom of your work force.

So, let's see how to avoid that rather miserable situation...


Podcast: MP3 Version

Do you know that, on average, a Twinkie will explode in a microwave in 45 seconds?

This is, I believe, less time than it takes for your business development people to go ballistic and start sabotaging your company's success when they realise they get grossly underpaid, so the "suits" can pocket more of the money the business development people have created.

For many years, one of the greatest headaches of business owners has been the gross misalignment between their marketing and sales departments.

But when we look at the misalignment between business development (marketing and sales) and the rest of the company, what we have is the proverbial Grand Canyon.

Business owners oversimplify business development when they believe that business development people can be made singlehandedly responsible for generating revenue for their companies, and everyone else can just wait for the money to come in.

Then the big boss can take the money, redistribute it among the rest of the employees according to his discretion (nepotism), and give the business development folks just enough that doesn't piss them off and make them quit.

Commissions are even worse. Commissioned people get singled out for getting paid for their performance, although a significant chunk of their performance is not even under their control.

And when the expected performance doesn't happen, everyone gets paid as if nothing had happened, except the business development folks or the salespeople.

Look at most IT companies, and what you find is that only business development people are held accountable for their performance, while the others can merely exist and pick up their paycheques every fortnight regardless of their performance.

The attrition rate in business development is notoriously high.

What this gap between the business development folks and the rest of the company also means is that business development folks are compensated for individual short-term performance, but all the others are compensated based on long-term department- or company-wide performance.

The problem starts with...

Failing To Recognise That You're In The Complex Sale Business

It's bad enough to have salespeople without subject matter expertise, but treating them as people doing simple sales is a disaster.

How does this happen from the management's perspective?

I few years ago, after one of my talks, I had a discussion with Joe, an IT sales guy in his mid forties. He was a bit more than frustrated.

He had a great year in the previous year, and thanks to his skills and smart work, he had mad a pisspot of money.

But his manager thought it wasn't normal to let one person earn so much money, so he had a cunning idea. At the end of the year, he doubled Joe's quota, halved his sales territory and pretty drastically cut back on his commission.

What Joe realised was that if he still wanted to make reasonably good money, he had to work harder than a prisoner in a Gulag labour camp, and had to take more time away from his family.

You see, his sales manager failed to realise that they were in the complex sale business, and he couldn't just rapidly change salespeople without consequences.

So, Joe asked me about what I thought he could do.

I suggested to him that he could quit his company, click over into broker mode, and instead of selling one company's stuff, he could secure projects and hire his company as his subcontractor.

I told he was expected to operate as a lone wolf anyway without any support from his employer, so why not operate as one and keep all the money.

And this is what Joe did.

Over the years he's acquired quite a few clients, and has sent a number of RFPs to his former employer. Maybe due to price or something else, but his former company has never responded but threatened to sue him multiple times for stealing clients.

But Joe has never stolen clients. He's acquired those clients, and therefore he had the right to notify them about his departure from his company.

You see, salespeople who are so good that they are worth hiring, don't want a corporate albatross around their necks. They quit when they feel they've got hard done by.

But since the sales terrain has changed to team-based consultative selling, that requires a better approach to compensation than the straight commission approach.

So, what is the problem?

Many business owners want to hire superstar salespeople who are very very cheap to run. So, business owners decide to pay straight commission to their salespeople.

The problem is that salespeople, just as any people, want a certain level of security in their lives. That's just how the old reptilian brain works, and there is nothing we can do about it.

So, because of this instruction from the old brain, people keep searching for more and more secure positions for themselves.

Now, you may say, you pay a generous 15% commission to your salespeople, but if you consider they take 100% of the risk, do 100% of the work and invest 100% of their own money in the pursuit of new business, 100% risk for a 15% reward is pretty pathetic.

So, it's not surprising that the best salespeople simply become deal brokers, and invite their former employers to bid on projects.

This is not exactly what we could call good news, but it certainly has a positive side to it.

Most of those salespeople who become brokers are the types of people who prefer to work alone. It also means that people who prefer to work in teams stay with you. They are not sales superstars but we don't need superstars anyway.

What we need is a cohesive team of pretty good people capable of lateral thinking. In an odd way, this is like building a car.

If you get the best engine, the best breaks, the best transmission and the best body, do you have a car? No way. What you have is a pile of best-in-class bits and bobs. You have the best of everything, but you couldn't drive it from point A to point B.

But you can also take a car, say, a BMW 300 series, which is a great car but far from the best of the best. But it is a car, and it can be driven.

Business development is the same.

You don't need superstars. You need a cohesive team of pretty good professionals, and they will run rings around lone wolf superstars.

So, now let's look at...

Individual Performance vs. Team Performance

And here let's define performance first. There are people who believe that past performance is a perfect predictor of future performance. I disagree.

I say past behaviour is a perfect predictor of future behaviour. And performance is applied behaviour in a specific environment.

For instance, take a top-notch executive assistant out of her private sector employer and put her into a unionised public sector office to be a top bureaucrat's assistant. I'm almost certain she would fail rather miserably.

Why?

In the private sector, she applied her behaviour (talents, skills, expertise, etc.) in a merit-based culture.

But in the public sector merits don't exist. It's a sort of brotherhood, and what really matters is politics: Scheming, scaming, kissing up and kicking down.

So, no matter how good she was in the private sector, in the fundamentally corrupt public sector she would fail.

So, it's business owners' responsibility to create kick-arse cultures in their companies, in which great people can naturally thrive. In which people are compelled to do their best work.

This approach applies to individuals too, but even more to teams.

Yes, if you are lucky to have business development people who also have technical expertise and experience, they may be able to perform individually, but as technical complexities have grown over the last few years, what I see is that it's always teams of professionals that make sales, not lone wolves.

This also means that individual compensation would be rather retarded, because it creates competition within the business development team.

So, let's look at the team's compensation.

As we've discussed before, these team members are not superstars but pretty good professionals. Nothing earth-shattering but steady, trustworthy and reliable citizens, who would struggle in a lone wolf environment.

Some Reasons For The Team Approach

But why would anyone engage in this team approach, considering that letting loose a bunch of lone wolf peddlers is a lot easier than, leading a cohesive team?

Yes, that's correct, and when we try to keep the costs down, that could be an approach. But there is a world of difference between low cost and high return. And while the lone wolf approach costs little, the return is equally little.

Why?

There are three ways to grow a business...

  1. Increase the number of clients - This is far the most expensive way of growing a business, yet, most IT companies focus some 80% of their business development budgets on getting new clients
  2. Increase the number of projects per client - This can work only if the company has a broad range of expertise
  3. Increase fees and prices on projects - The art and science of pricing. Every 1% price increase can add 11.7% to your profits

Yes, lone wolves can achieve #1, but you need a business development team to pull of #2 and #3.

The quick buck of #1 gives salespeople the thrill of the chase, which many of them crave a lot. Unfortunately what it doesn't give the business is profits.

Profits come from #2 and #3, but most salespeople find #2 and #3 too boring, so they hardly ever do it. It's sad because the profit is in #2 and #3.

And while lone wolf salespeople can do #1, #2 and #3 require business development teams.

And here are nine ways how teams win over lone wolves.

  1. Teams can provide higher pre-sale value to clients, thus sellers can charge and receive higher fees and prices
  2. Teams can create an uninterrupted relationship with clients regardless of which team member is on vacation or on medical leave
  3. Teams can offer an advantage by offering a multi-perspective view of the client's business
  4. Teams can serve clients more flexibly and responsively
  5. Teams can increase sales price, reduce cost of sales, thus increase margins
  6. Teams can offer a broader range of resources for clients
  7. Teams can provide a "two heads are better than one" approach
  8. Teams can offer better project management
  9. Teams can offer a more competitive approach on the market where the lone, independent aggressive salesperson is still the norm

Individual Vs. Team Compensation

When we look at compensation of business development people, we have to look at individual vs. team compensation and short-term vs. long-term compensation.

Compensation Matrix

Short-term individual compensation is what most IT companies use because their owners and leaders erroneously believe that dangling the proverbial carrot in front of their business development people makes them perform better. It's totally false, but old habits die hard.

Besides, it would take some thinking to use a better approach, and thinking is something most people don't want to do. This form of compensation is either straight commission or base pay plus commission but only on newly acquired business.

long-term individual compensation is based on a base pay plus bonus based on individual performance. The bonus is based both on new business and recurring business.

This is good because clients usually like starting small, and as time goes by, their projects get bigger and more expensive, offering bigger bonuses for the business development folks.

short-term team compensation is based on a base pay plus bonus based on the team's overall performance. But it's based only on newly acquired clients.

Long-term team compensation is based on a base pay plus bonus based on team performance. The bonus is based both on new business and recurring business, so the team has an incentive both to bring in new clients and retain existing ones.

Since the rewards are based on the team's performance, rivalry within the team disappears. Also, if there is a problem with a member's performance, the other team members take care of the underperformer without any heavy-handed interference from management. Peer-pressure is much more effective than pressure from superiors.

Now, I don't know about you, but I'm in business for the long-haul, and I want to make sure so are all my people. I want to run a strategic business not an opportunistic one jumping from the left to the right and back to the left in hot pursuit of the quick buck.

So, using a reasonable base pay, I want to assure my people that they actually belong to the company, and some short-term ups and downs of the business won't force them to starve or sell their homes for food.

Employees are employees because they want to feel a pretty high level of security. If they didn't have cravings for security, they would be competitors.

So, they get their base pays but the real McCoy is the bonus structure. And since I expect people to give 100% effort in their work, I pay everyone the same.

This may be shocking, but I've found over the years that this approach eliminates jealousy within the team. And that's a pretty good idea.

What I've also found is that people are more willing to take on more work if needed, so we can avoid hiring new people because then we have to split the bonus pool among more people.

You can increase a team's performance either by recruiting more people or tweaking the system. We prefer to work on the system and recruit only when it's absolutely necessary.

Of course, there are many business owners who want to keep as much money as possible by under-paying their people. And this leads us to...

The Curse Of Low-Paid Business Development People

Since you sell high-ticket solutions, your sales process must be pretty high-touch. Before signing on the dotted line of a contract, there is significant interaction between buyers and sellers. Actually, I've read somewhere that in a project over $10,000, some 21 people are involved in the decision-making on the buyer's side alone.

What this also means that high-level decision-makers in the buyer's side often interact with lower level people on the seller's side.

And here comes the impact of being underpaid.

When people are underpaid, on the top of resentment against their employers, they develop a poverty mentality, so when they talk to affluent people on the buyer's side, these people subconsciously act out their own poverty.

They feel pity for those poor clients the company tries to gouge, and now the greedy boss wants to charge them those high fees. So, subconsciously, employees repel clients and encourage them to start haggling.

Underpaid people end up making hints to buyers, like...

"Yes, you're right. It's far too expensive."
"I agree. What this company does is daytime robbery."
"I would never buy it at this price."

Here is the basic problem.

In our world, most employees are convinced that the purposes of a business are...

  1. To pay taxes
  2. To provide jobs
  3. To give back to the community

Not at all.

  1. A hefty portion of collected tax money is wasted on various useless government schemes and scams that do nothing or very little for the public, but make some government bureaucrats even more overpaid than they are now (relative to their produced value).
  2. If your company doesn't need people, there is no need to hire anyone.
  3. If you've never taken anything from the community, so there is nothing to give back.

A business owner's only responsibility is to improve his business by creating value outside his business.

For higher value, the business can charge higher fees and prices. Now the business has better profits, and can plough more dough back into the business for future growth, including hiring more people.

But all this must be driven by enlightened self-interest. That is, creating wealth for people inside your business.

When we run a business, we can run it for the lowest cost or the highest profit. And it takes money to make money, so there are certain costs to running a highly profitable business.

Google is regarded as one of the most successful companies. In 2008 Google pulled off $1,080,914 revenue per employee and $209,624 pure profit per employee. For every employee, 19.3% of gross revenue became net profit.

And Google is happy spend so much to produce this outstanding profit. The leaders know that trying to cut costs would cut profits even more.

By contrast, for HP, this number is only 7%. ($368,735 gross revenue and $25,947 net profit).

And for an Indian software company, called Baidu $499,961 gross revenue per employee becomes $163,844 net profit per employee. That's 32.7%.

And I dare to bet some vital parts of my anatomy that Google or Baidu-like high profits are not produced by underpaid people.

A company can't ask its people to make it filthy rich, while the company is trying to keep its people dirt poor. It just doesn't add up.

Let's just accept the fact quality people, who can produce and are worth employing, are not cheap. They don't want outrageous salaries. But they are employees because they want a certain level of security. Otherwise they would start their own business and go into competition against your company.

So, from the business owner's perspective, what is better? To have the best talents in your industry fight in your corner or let them set up their corners and fight against your company? I think the first option is better, since with every competitor you have less and less chance to be the top dog.

So, just pay them well, and let them focus on doing amazing work.

Come and let's discuss this newsletter issue on my blog...


Attribution: "This article was written by Tom "Bald Dog" Varjan who helps privately held information technology companies to develop high leverage client acquisition systems and business development teams in order to sell their products and services to premium clients at premium fees and prices. Visit Tom's website at http://www.varjan.com.