MSP Sales Compensation Planning

MSPs find it challenging to implement balanced compensation plans for their sales teams. New business is tough to come by, prospects are hard to convince, and then there’s the problem of ‘demotivated sales team.’

Thankfully, the latter is in your control. The right compensation plan can catalyze a salesperson’s sense of ambition into real action and can get you another client.

Another factor to consider is the longer your current compensation plan remains in effect, the harder it comes to overhaul it.

Your dependable salespeople will resist the change, your new sales champs will be caught in the transition, and your underperforming salespeople will simply play ‘confused’. How do you manage? By thinking your new compensation plan through, with plans A, B, and C.

So, if you’re looking for better results via a better sales compensation plan, the right time to act is now. Let’s tell you more about compensation planning for your MSP sales teams.

So, What Comprises a Good Sales Compensation Plan?

There are two aspects of the compensation provided to sales reps.

The first is the salary and the second is commission. The salary is your salesperson’s fixed income (paid out bi-monthly or monthly), and the commission is paid out based on their performance and the number of deals they’ve closed.

The salary is a fixed and periodic income, promotes stability and confidence in a sales representative. It can become the reason salespeople may fall prey to a laid back attitude.

With a fixed salary, a sales rep would more likely work hard since they respect their employer for paying them even if sales are not blistering. This reduces financial pressure, and the person can work without feeling any extra pressure to close deals.

However, with a fixed salary, a sales rep may also feel that even if he or she doesn’t always perform up to the mark, they will be paid nevertheless.

With a compensation plan that’s heavy on commissions (the variable component), a sales rep may feel insecure about the paid amount. This may even pressurize them and take the ‘belongingness’ out of their association with your company.

That said, a commission-based model can also motivate your sales teams as nothing else can.

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You need to implement a precise balance between salary and commission. And that’s where compensation plans become crucial determiners of sales-success.

Here are three major types of compensation plans used by most MSPs. You may even develop your own concoction of these plans. These plans are:

Up-Front Payment
Residual Payment
Pure Commission

Up-Front Payment

In this plan, you pay a lump-sum payment to the salesperson for any new business they get. The compensation is directly proportional to the revenue the salesperson gets. This works in your favor in these ways:

Salespeople become motivated to sell managed services rather than traditional IT services.
They become hunters (focused on getting new business) rather than farmers (focused on getting incremental business out of existing accounts).
The ‘front-loading’ nature of the compensation motivates sales teams to close sales so that they can get their near-term rewards.

Further reading How to Sell Managed Services to SMBs

Residual Payment

In this model, you pay commissions to your salespeople monthly, based on the monthly revenue you get from the business they secure for your MSP company. While you get to map out your commission costs to your monthly revenues, this may be a demotivator for salespeople as the monthly pays they get isn’t massive.

While this model offers you more control and lowers your risks of ‘overpaying’ salespeople, it has its downsides. If the contract is canceled in between, say the fourth month itself, the sales rep may not get his/her commission from that month onwards.

The sales team may feel demotivated as commissions are slow to come. To avoid this, they would prefer cultivating existing client relationships and protecting their revenue source rather than fishing for new clients.

If your MSP service is focusing on farming existing client accounts, such a compensation plan may work very well.

Pure Commission

In this compensation plan, all payouts are based on commission. There is no base salary. The more clients your salespeople land, the more commission they earn.

Also, because the MSP remove all risk of paying salary to a sales-team (without any guarantee of results), the per-deal commission is also a lot more than other models. This provides the most significant incentive for the sales reps to perform well. These models are mostly used by many successful and large MSPs.

Though not a very commonly chosen model, this may just be what you need to get some groundbreaking business deals from a team of highly skilled and empowered salespeople.

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Key Performance Indicators (KPIs)

Just as it is essential to have good incentives for the sales team, it is even more critical to define the right performance metrics. These performance metrics help you establish a good compensation plan. Some KPIs can be as follows:

New leads and opportunities generated
Number of leads converted
Volume of sales
Existing client satisfaction
Upsell and cross-sell performance
The time needed for the sales cycle

Further reading Guide to MSP Sales Critical Metrics

There are numerous other KPIs that you may use as per your organization. It is vital to have a standard while giving out commissions. It helps to build the trust of your sales reps in your compensation plan.

Don’t go chasing KPIs without first understanding your business’ vision, and then carefully selecting (and even altering) the most relevant KPIs. If you’re going to use the KPIs to define your compensation plan, this becomes even more important.

How to Improve or Optimize Compensation Plans?

Do not keep your sales reps waiting for too long to get a raise. Gradual and regular raises keep the team motivated. You can also keep paying incentives and big payouts at regular intervals.
Always explain your reps how much they will make from a deal. Show them that they’ll earn more, but for that, they need to sell more.
You can increase compensation for difficult sales, which motivates the reps to try harder. This also prevents the problem of several salespersons ignoring prospects because they’re too hard to sell to.
It’s natural for salespeople to take it easy when they keep earning commissions on already set accounts. Try to reduce that by decreasing the compensation for easy sales such as renewals and add-ons of existing customers.
You can announce cash bonuses for attaining significant milestones. You may decide milestones based on the total value of contracts the rep has brought in.
You can utilize Commission Accelerators. As achievements increase, the commission multipliers can be increased.
Show your appreciation for your salespeople’s big achievements.
Build a robust review mechanism, know your numbers, and deep dive into the world of stats, probabilities, ROIs, and more to fine-tune your compensation plans.

These measures are bound to deliver excellent results and are easy to implement. Also, the best part of that they won’t be a burden on your coffers.

Compensation Planning for New MSP Businesses

Now that you’re starting up, here’s something you need to know about MSP compensation planning specifically for your business.

Start with a full salary for 6 – 12 months. This gives your sales reps enough time to build your business.

Once the business is steady and you have reliable revenue streams in place, a gradual shift to commission is useful. This would keep your sales reps on toes to find new clients. You may scale back the salary to achieve a final split as – 30% salary and 70% commission.

This motivates the sales reps to maximize their income by bringing in higher-value clients.

Remember that, for retainer contracts, the commission is generally between 1 and 2 months worth of the monthly recurring revenue (MRR). This again is dependent on the contract length. While calculating, bear in mind that for projects, it should be between 10% and 20% of the gross profit.

Calculate the commissions based on KPIs and make sure you keep appreciating your sales reps through talks and incentives.

Key Aspects

Compensation plans are the primary motivator or de-motivator for your sales representatives. A good balance of salary, commission, and incentives can help keep the sales team-high on spirits.

It is an excellent option to start with a basic salary and then to migrate to a commission-based model after your business gets set. A concrete compensation plan will retain your trained sales team and encourage them to work harder.

Denis G

Denis is a content manager at MSP360. He learned the product and cloud services the hard way - as a support team member. He finds the simplest descriptions to difficult concepts and makes comparisons between services, features, products and other comparisons.

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