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Incentive Compensation as a Way to Scale Your Business

If you go to seminars or troll through the internet trying to figure out how to scale your business, you’ll get lots of inspirational advice. “Think Big!” “It’s a P2P World!” “Learn How to Measure!” It all gets very urgent and breathless, and none of it may leave you feeling like you know exactly what to do tomorrow morning.

What all this advice points to, however, is the need to consider structural changes in your business model. Big businesses don’t work exactly like small businesses. If you’ve decided to focus on that common exhortation to “Surround Yourself with the Best People!” you may want to think about a role for incentive compensation in attracting and keeping talented salespeople.

Balancing Customer Retention and New Business

Sales compensation typically consists of some mixture of base pay and incentive compensation.  The mixture must be carefully designed to support the business goals that you want to achieve.  A higher proportion of base pay encourages efforts to protect market share and retain current clients.  A higher proportion of incentive pay is likely to drive territorial expansion and the acquisition of new business.  Every enterprise needs both, of course, but if your goal is to grow your business exponentially, a shift in in compensation structure toward incentives may make sense.

Kinds of Incentive Compensation

Commissions are the most common form of incentive for salespeople.  The traditional fixed percent/dollar approach pays the same percentage of commission for each sale.  An accelerating commission is one that increases throughout the year and typically drives year-end sales.   The formula should also consider the cost of the sale, the company’s margin on the sale, whether it is a new or established product and how long the sales cycle is. Selling highly sophisticated technology may take a very long time, and the commission should recognize this. It is also important to pay attention to when the commission is paid.  Should it be paid when the deal is closed, or some time thereafter to allow an opportunity to assess customer satisfaction?

Beyond commissions, an incentive package might include bonuses, stock options, which may give an employee a sense of ownership, time off with pay, trips, gift certificates and entertainment tickets. Depending on your sales force and company culture, the non-monetary rewards may actually be quite powerful. They may also have some collateral benefits for employee retention.

The Legal Landscape

At first, the entrepreneur often wears all hats.  Then, on to a few independent contractors, and perhaps a part-time employee or two, and so on, until there are a couple of full-timers, and a few part-timers or independent contractors.  That may be when the urge to scale strikes.

Incentive compensation should only be offered to workers who are considered employees. An effort to pay independent contractors in this way may inadvertently turn them into misclassified employees and expose an employer to major legal liability.

Employers should also be aware that they are generally contractually obligated to pay incentives that have been expressly promised.  If the incentive is paid to a worker who is also eligible for overtime, the value of that incentive should also be included in the calculation of base pay.  In some circumstances, employees on FMLA leave may be eligible for the payment of bonuses based on the achievement of certain workplace goals if employees who are on other kinds of leave are eligible for those payments.

One approach to scaling your business may be to re-structure sales compensation, but be sure the design supports long-term business goals.

Nasir Pasha, Esq.

Post by:

Managing attorney and co-host of podcast Legally Sound | Smart Business

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