New hire sales incentives — including draws and guarantees — are a necessary component of sales compensation packages and help CSOs attract top sales talent. Unfortunately, many miss the opportunity to leverage these incentives as a tool to motivate seller behavior and reward onboarding performance.
Protecting new sellers’ cash flow has merit, especially since many sales cycles can last for months or years — this means that new sellers building a pipeline would have to wait that long to see results and earn commissions. The reality is that many sellers view new hire incentives as an entitlement. Unfortunately, compensation entitlements undermine the pay for performance culture sought by so many CSOs. Perhaps it’s time to revisit the legacy approach of typical draws and guarantees.
Typical Approaches to New Hire Draws and Guarantees
Many organizations have different definitions of new hire draws and guarantees. To level set on terms, let’s say that:
- Draws provide sellers a minimum compensation level with the ability to earn more based on sales performance
- Guarantees are a fixed payout regardless of performance
Using these descriptions, we can agree that draws are more attractive to sellers since the downside risk is managed but the sellers have upside earnings potential. It’s also worth noting that guarantees may backfire and tempt some sellers to postpone sales performance — this is assuming that sales secured during a guarantee period do not trigger extra compensation. Any incentive program that potentially encourages sellers to postpone deals is problematic.
An additional dimension to new hire incentives is “recoverability.” Recoverability describes the organizational right to recapture commissions — often called a clawback — based on sales performance:
- Recoverable — Organizations retain the right to claw back commissions based on seller performance
- Nonrecoverable — Organizations forfeit the right to claw back commissions based on seller performance
Traditional new hire incentives are a fair and common practice, but they miss the opportunity to reinforce the pay for performance mentality with new sales employees. New sellers are still learning about the organization, so this transition period is the perfect time to strengthen this aspect of the sales team’s values.
A Better Approach – Pay for Onboarding Performance
CSOs can overcome the lack of sales results by tying the new hire incentives to key sales objectives (KSOs). KSOs can include onboarding milestones or other new-seller activities. Instead of operating as an entitlement, the new hire incentive:
- Rewards the achievement of early milestones
- Aligns with the pay for performance culture
- Reinforces the importance of onboarding
KSO-based new-hire incentives can be structured similarly to nonrecoverable draws. Sellers earn 100% of their new hire incentive by satisfying KSOs, yet retain the ability to earn additional commissions based on sales performance. New sellers will appreciate the ability to earn their nonrecoverable, new hire incentives based on onboarding effort and success, while CSOs will gain value by reinforcing the pay for performance culture.
Importantly, all competent new sellers should be able to achieve success and earn 100% of their expected new hire incentive. This approach is not meant to yield savings to the organization or to put too much risk on seller pay. If the KSOs are too aggressive, seller engagement will deteriorate.
To effectively design a new hire incentive built around KSOs, CSOs should collaborate with their sales operations, enablement and compensation leaders. The recommended steps include:
- Map out the onboarding program and timeline
- Identify onboarding milestones and verifiable outcomes
- Align the new-hire incentive duration to the average sales cycle duration
- Enable sales managers to support the new-hire incentive program
CSOs have an opportunity to embed and reinforce a pay for performance mindset into each new sales employee. It is time to evolve from the new hire incentive common practices to a more progressive approach.
This is my last blog of 2020 – what a challenging year for so many. I hope you all have a happy holiday and new year. See you in 2021!