Compensating Your First Employees When You are Cash Poor

startup employee compensationMany startups begin with a founder that spends part-time on the idea while still having a paying job.  Another common approach is to secure a small amount of funding via “friends and family” or even to self-fund with personal savings. These super-lean methods of starting can be great for focus during the early validation stage but once the idea is proven and more resources are needed, how does the startup go about hiring the first employees with zero/little cash in the bank and not enough revenue to self-fund?  The answer probably lies in equity but it’s not as easy as some think.  In this blog article I will explore the various nuances and give some specific examples and recommendations.

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Documenting Your Sales Compensation Plan

sales compensation planI can’t tell you how many startups go through the effort to think through the best method to compensate their sales team but don’t take the next step to document it so that it can be clearly communicated.  Deciding about the metric(s) on which to pay the sales team and the right split of base compensation versus sales commission is absolutely fundamental to any sales compensation plan.  But that’s not enough.  If you read my other sales-related blog articles titled 5 Golden Rules for Setting Sales Compensation and Is Your Sales Incentive Plan Driving Bad Behavior, you know there are several other factors that must be included in the full plan.  Two of my mantras are that it must be simple and it must be clear.  This blog article will describe what should be in the documented plan that you deliver to each commissioned sales rep and have them sign in acknowledgement.  I have even included a template for you to use.  So no excuses.

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Two Variants of the Straight Line Sales Commission Plan

In the spirit of keeping a sales commission plan simple, many business owners or sales executives choose to use a straight-line methodology.  In other words, 88% achievement of the sales goal equates to 88% commission payout when compared to the “at plan” (or “on target”) amount.  Seems fair, right?  It’s definitely simple.  But it leaves out features that some sales reps and sales managers are probably looking for.  Let’s explore further while introducing two variants to the straight-line sales commission methodology.  I’ve also included a sales commission calculator for these two variants.

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Absolute Versus Relative Sales Commission Plans

Compensating a sales team is a tricky and sensitive endeavor that requires a lot of advanced planning.  I previously wrote about my 5 Golden Rules of Sales Compensation.  But even if you follow those rules you’ll need to decide about the underlying structure of the sales commission plan.  And while there are almost infinite number of ways to compensate a sales team, most of them fall into two categories: absolute or relative.  This blog article will explain the fundamental differences between these two methods to help you decide which is best to use for your sales team.

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MBOs Demystified

MBO bonusCertain roles in the company call for a bonus as part of the total compensation plan.  But what criteria should be used for determining the bonus payout?  Common choices include company-level, department-level, individual or some combination of these.  These are different from sales commission plans (see related article titled “5 Golden Rules for Setting Sales Compensation Plans“) and are commonly called Management By Objectives (MBOs).  The original concept of the MBO was introduced by Peter Drucker decades ago.  And although the way MBO bonus plans are administered has evolved over time, it is still is an important part of many management systems today.  This blog article will explain the basic components of an MBO bonus plan and some tips for administering them.  I’ve also included an MBO template for you to use.

Since company-level targets are (hopefully) highly scrutinized and well thought out by the management team, they’ve already been well vetted before you find yourself needing to incorporate them into bonus plans.  But the closer you get to setting targets on individual performance, the harder it gets and the wider the possible under/over-achievement.  So you’ve really got to be careful.  Below are some key rules of thumb to keep in mind:

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Compensating an Advisor

startup advisor compensationHow much equity should you give an advisor?  Should the shares carry any special provisions like anti-dilution or change-of-control acceleration?  What about giving the advisor cash compensation?  Tough questions for a startup founding team that’s doing it for the first time and faced with an advisor they desperately want to bring on board (see related article titled “Selecting an Advisor”).

The short answer is there is no universally-agreed market rate for advisors.  And if you want a superstar, you’ll need to pay whatever they demand or be forced to go with one of your other options.  But I realize that doesn’t give any guidance so for purposes of this article let’s take superstar advisors out of the equation and just deal with “normal” scenarios.

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5 Golden Rules for Setting Sales Compensation Plans

Sales incentive plans are really delicate things.  This stems from the fact that the best sales reps/managers intuitively do whatever puts the most money in their pocket.  They do so assuming the company has put a lot of thought into how they are incented and, therefore, whatever pays them the most surely is good for the company too.  Because of this, don’t expect a sales rep to read your mind.

Never break these rules when setting commission plans for your sales team.

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Is Your Sales Incentive Plan Driving Bad Behavior?

This is one of my five golden rules for setting sales compensation (see related article titled “5 Golden Rules for Setting Sales Compensation Plans“).  Within legal and ethical limits, a good sales reps should do whatever puts the most money in their pocket and it’s up to the company to make sure that behavior is consistent with the company strategy.  But this is sometimes easier said than done so let’s explore further.

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