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Benchmark survey: sales compensation.

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(Tabular Data and Other Figures Omitted)

As the software industry grows more competitive, sales departments have begun to play an increasingly strategic role. Great products and well-conceived marketing programs are no longer enough to guarantee success in the marketplace; instead, the real winners these days tend to be companies that can attract--and retain--talented sales professionals.

Thus, it's not surprising that company managers have been keeping a sharp eye on sales compensation trends. Especially in high-growth companies, maintaining paycheck parity is often as critical as staying current with product technology and features. But what is the market standard in sales compensation? Certainly there is no shortage of comparative yardsticks. For example, the SPA's annual Software Industry Salary Survey provides useful data on sales salaries by job title, company size, and geography (Software Publishers Association, 1101 Conn. Ave., NW, Washington, D.C. 20036; 202/452-1600; price, $100-$400).

But simple paycheck comparisons don't tell the whole story. More than any other job function, sales is an area where compensation depends largely on individual performance, often measured against short-term goals and the relative performance of other salespeople. The important question in sales compensation isn't the value of an average" W-2, but rather how to motivate and reward a sales force with the right mix of salary and incentives.

To provide a clearer sense of industry-wide trends in this area, we recently surveyed our database of companies about paycheck practices for a variety of sales-related job titles, ranging from senior sales executives to part-time sales associates. Although we collected standard data about compensation ranges, we also probed more deeply into such areas as equity participation, commission structures, sales quotas, and performance goals.

By our mid-August cutoff date, 171 companies submitted usable data for this effort. (As usual, we did not accept anonymous survey responses, though the names of all respondents are confidential.) Since our universe of companies ranged from organizations with as few as two employees to those with more than a thousand, some survey questions yielded relatively few responses. But overall participation level was high enough that we feel confident that this report provides a reasonably accurate picture of current sales compensation trends in the software industry.

Like our previous Benchmark Reports, this special issue of Soft-letter covers the highlights of our research findings. For those who wish to explore the survey database in more detail, we also provide a data disk with all of our raw data--except company names--from the survey questionnaires we received. Data disks may be ordered from Soft*letter for $50 prepaid; available disk formats include Lotus 1-2-3 and Excel (DOS) 5.25" and 3.511, and Excel (Mac) 3.511.

COMPANY DEMOGRAPHICS

Our survey questionnaire collected a variety of data about company demographics, including application categories, product prices, and total employee count. But clearly the most important single factor that affects sales compensation is company size. Our survey database included 66 companies with sales of less than $1 million, 54 companies in the $1-$5 million range, and 43 companies with sales over $5 million. (For statistical purposes, we consolidated responses from companies in the $5-$10 million and 10+ million ranges.)

In total, the 171 companies in our database employ 9,453 people, with a median headcount of 13 per company. When we analyze employment levels in terms of company size, important differences appear in the way various sales functions are staffed:

These numbers suggest an important point about how sales departments are organized in small and mid-sized companies. Typically, software companies seem able to grow into the $1-$5 million range with very simple sales departments--a manager, an administrative assistant, and two or three salespeople, who are most likely to be telemarketing reps. Only when companies pass the $5 million revenue mark do we begin to see more complex sales organizations, with several managers and full-fledged field sales and telemarketing departments.

And, of course, there seem to be significant economies of scale in the sales function. The small companies in our sample devoted 40% of their manpower to sales; large companies, only 18%.

SENIOR SALES EXECUTIVES

As we expected, our survey data shows a wide range of titles among the executives who head the sales organizations of software companies. The most common title (34 responses) is vice president of sales, followed closely by vice president of sales & marketing (32 responses) and director of sales (28 responses). We also found a significant number of vice presidents of marketing who head sales organizations (19 responses), and many national sales managers (15 responses). Finally, 22 owners and presidents reported that they currently serve as chief sales officer for their company.

Our data also shows some important links between titles and the size of the chief sales executive's paycheck. Vice presidents of sales top the salary charts, with a median base salary of $65,000 per year and total incentive pay of $25,000. The 50% range of base salaries in this category (that is, the middle half of all responses) runs between $42,500 and $103,000. And these are the salaries that are growing most rapidly: The median increase in compensation over the prior year's compensation was a healthy 18%.

However, an even more important factor in compensation levels is company size. Predictably, bigger companies tend to have deeper pockets: Chief sales executives in companies with over $5 million in revenues typically earn more than twice as much as their counterparts in smaller companies:

So how do small companies compete for talented sales executives? The magic word is equity. Although company stock is a common form of compensation for software companies of all sizes (overall, 62% of respondents to this question report that the senior sales executive has an equity position in the company)--smaller companies offer substantially larger amounts of equity. In fact, the median ownership share for companies under $1 million in revenue is 45%; the median for sales executives in large companies is a modest 1%.

In part, sales executives in small companies seem to have earned their larger equity share by participating as founders or co-founders of their companies. moreover, they tend to have joined the company at an earlier (and presumably risker) date, and they have stayed longer with the organization.

Company size also has considerable impact on how the chief sales executive's performance is measured. As a whole, the software industry tends to focus most heavily on revenue goals when measuring the effectiveness of senior sales officers: 45% of our survey respondent's use revenue as a yardstick for incentive payments in this category, compared to 22% who measure profitability and 7% who measure overall growth. Larger companies are even more likely to emphasize revenue-based performance standards: 55% of companies with over $5 million in sales pay bonuses to their senior sales executive based primarily on revenue goals.

Among smaller companies, however, performance measurement for sales executives seems to take more factors into account. Revenue goal s are still the primary measure for 37% of smaller companies, but profit goals are used almost as often (33%). And 26% of small companies apparently measure performance on a case-by-case basis, with incentive bonuses paid at the discretion of the CEO or board, compared to only 12% of large comPanies that base incentive payments on the discretion of top management.

REGIONAL SALES MANAGERS

Not surprisingly, we received relatively little data about compensation for regional sales managers (defined as "managers who oversee field sales reps")--and almost all of our responses came from large companies. However, 27 companies did supply us with detailed information about salaries, incentive payments, revenue goals, and regional compensation differences; several other companies provided partial information that helped fill out the picture.

In essence, this data shows that regional managers tend to be compensated through a combination of a base salary (with a median value of $40,000 per year) and incentive payments (worth about $25,000 per year). This ratio between base salary and incentives, incidentally, is almost exactly the 60%/40% ratio that we find is considered ideal for compensating field sales reps (see below).

* Geographical differences: Since compensation for regional managers is largely based on the revenue potential for the manager's territory, we also looked it differences in total compensation for East Coast, Central, and West Coast regions. Despite the popular wisdom that West Coast salaries are the industry's highest, we found that regional managers in the East have the fattest paychecks:

* Sales responsibilities: our survey data also shows that most regional managers are expected to divide their time between management tasks and actual selling. Sixty-five per cent have "direct sales responsibilities"; the median number of direct accounts that these managers service is 11, with a 50% range of 10-25 accounts.

* Incentive basis: Performance goals for regional managers tend to focus explicitly on revenue generation, both from direct selling and from territory management. By far the most common basis for incentive payments is "performance against sales goals' (63%), compared to "discretion of management' (16%), profit goal" (9%) and "growth goal" (9%).

FIELD SALES REPS

Developing a compensation package for an outbound sales force is a notoriously complicated problem. The compensation plan has to reward above-average skill and effort, yet at the same time it should be perceived as equitable by average and even below-average reps--who often account for more total revenue than a few superstars. In addition, incentives should focus the sales force's efforts on the most profitable business opportunities, without neglecting coverage of more marginal accounts or channels.

For those companies that sell through resellers, there is often a further complication: The selling process is indirect and difficult to track. Reps make corporate presentations that can result in large orders that are placed through resellers, perhaps even in another territory; at the same time, an aggressive reseller may generate business with no support from a local rep.

How do software companies resolve these problems? Typically, we find that rep compensation plans start with a base salary component that reflects the individual rep's experience and historical performance, with additional incentive payments based on ongoing future sales performance. our survey questionnaire collected data about pay levels for three performance-based categories of sales rep--"top 1/3," "middle 1/3," and bottom 1/3," as well as for an average" category. Within these categories, we broke out base salary numbers, average commission income, and other incentives. The results show that, with average performance, a sales rep is likely to earn about $50,000 a year. Reps among the top third of performers will earn about 25% more than average; those in the bottom third will earn about 21% less.

We also explored a variety of other issues that are part of field sales rep compensation plans:

* Sales quotas: To a large degree, sales quotas (or "revenue targets") for software products depend on such factors as product price, distribution channels, competition, and market maturity. But our survey data reveals some broad patterns. Half of our respondents set annual quotas in the 400,000-$1,200,000 range for their field sales reps. And companies typically seem to set higher quotas for reps who are superior performers (presumably in return for higher base salaries):

* Base pay vs. incentive ratio: A frequently debated issue among sales managers is what proportion of rep compensation should be incentive-based. Although we found examples of companies whose compensation is virtually all salary-based, and others that pay their reps entirely on commission, the median ratio in our data is 60% base salary to 40% incentive pay. Moreover, half of all respondents fell within a fairly narrow range defined by a 70%/30% salary-to-incentive ratio at one end, and a 50%/50% ratio at the other end.

* Commission basis: we asked respondents their basis for calculating commissions, and received a variety of answers that primarily reflect differences in distribution methods. Thirty-three percent of respondents pay commissions based on direct sales to end users only, 19% pay commissions on sales to resellers only, and another 19% pay on sales to both end users and resellers. Another 14% pay on "sell-through" to end-users, while 16% reward contributions to profit rather than revenues. Variable rates. When a company's product line includes a mix of products--for example, a high-volume, well-established title and a low-volume, newly-launched title--it makes sense to vary the commission rate by product. We found that 23% of respondents to this survey question pay different commission rates by product, and 26% vary their rate by channel.

* Commission escalators: One fairly common incentive technique is to pay commission rates that increase progressively once a standard sales quota has been met. Our data shows that commissions typically scale up from 5% of sales at 100% of quota to 8% at 150%-200% of quota:

* Account load. Like quotas, the number of accounts a rep handles depends partly on such factors as distribution method, sales volume, and product price. But our survey data suggests that a rep can be expected to handle about 50 active accounts per month (fewer if most of those accounts are resellers):

* Sales contests: software companies do not seem to rely regularly on competition among reps as an incentive. only 30% of respondents say they hold "occasional" sales contests; only one company reported that it runs a sales contest every month. The median cash value of all sales contests in our survey is $500; the 50% range is $100-$1,000.

TELEMARKETING REPS

Especially among smaller software companies, a significant amount of sales activity is often generated by telemarketing or inside sales reps. In fact, mote companies gave us data on telemarketing pay than on field sales rep compensation, which suggests that the software industry in general may rely more on inside sales forces than on field sales.

In developing pay plans for telemarketing reps, sales managers face many of the same issues that are raised in field sales compensation. However, telemarketing departments tend to be staffed by employees with less experience and lower sales skills (or at least that's the common perception), so overall pay levels are lower.

Thus, telemarketing reps with average skills and performance earn about $20,000 per year in base pay (about two-thirds the base pay of a field sales rep), plus another $10,000 or so in incentive pay (about half the incentive pay of a field sales rep). The top third of performers earn about 25% more, while the bottom third earn 18% less.

Again, our survey questionnaire collected data on a variety of telemarketing rep compensation practices:

* Sales quotas: In general, software companies seem to expect lower sales productivity from telemarketing reps than from a field sales force. The median annual quota or revenue target for telemarketing reps is $300,000, compared to $500,000 for field reps. (This ratio tracks closely the relative difference in base pay between the two jobs.) Moreover, the difference between quotas for higher and lower performers is relatively modest. (Note that the median quota for all" telemarketing reps in this chart is lower than the value for bottom 1/3". This difference probably reflects the fact that companies that could supply data on rep performance levels tend to have larger telemarketing departments that achieve higher levels of sales productivity.

* Commission escalators: At 100% of quota, telemarketing reps earn median commissions of 4% on sales, compared to 5% for field reps. Above quota, however, the commission plans for the two groups are remarkably similar:

* Calls per day: Although one survey respondent claimed that his company's telemarketing reps were able to make more than 450 calls per day (about one per minute), we found that the typical telemarketing rep handles about 40 calls per day:

* Sales contests: only about 4% of companies with telemarketing departments report that they hold monthly sales contests; another 21% run contests on an occasional basis. The median value of contest awards is $250, with a 50% range of $100-$500.

SALES ASSOCIATES

A growing number of software companies (including many smaller firms) now rely on part-time sales associates to help with presentations and seminars, or to provide sales coverage in smaller markets. Our survey data showed several trends in compensation for the sales associate category:

* Basis for compensation: The most common practice among respondents who use sales associates is to pay only an hourly rate (48%). Another 29% pay only a commission on sales, while 2% pay only a fee per event. Another 15% compensate sales associates with a combination of an hourly rate and a commission; 6% pay an hourly rate and a fee per event. (Among those companies that pay sales associates a commission, the median rate is 10%.)

* Hourly rate: The median hourly rate for entry-level sales associates is $8.00, with a 50% range of 6.00-$9.00. With a year of experience, the median hourly rate rises to $9.00, with a 50% range of 7.50-$10.00. Many sales associates work close to a full-time schedule: The median hours per week for this group is-35 hours, and the 50% range is 25-40 hours.

* Event fees: Only six companies provided data on event fees, but these fees are probably fairly typical. The median fee for a one-hour event is $50; a two-hour event is $75; a half-day, $100; and a full day, $200.

THE IMPACT OF PRODUCT PRICES

Finally, one of the most interesting relationships we found in our data is the link between product prices and compensation levels. We broke out two categories of companies--those whose "most popular title" carries a list price of over $1,000 (26 companies), and those whose "most popular" title lists for $100 or less (41 companies). When we compare compensation levels among these two groups, the results show a clear pattern of above-average salaries among companies with premium-priced titles, and somewhat depressed salaries among companies that sell low-cost software. We suspect there's a message here, though the implications are likely to be hotly debated.
COPYRIGHT 1990 Soft-letter
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Copyright 1990, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:software industry
Author:Tarter, Jeffrey
Publication:Soft-Letter
Date:Aug 31, 1990
Words:2984
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