Thanks for your thoughts and questions. Essentially, you want to build your variable compensation plan so that it is aligned with your business goals – that is, it doesn’t cost you much when business is poor and rewards your team when business is good. The best way to do this is to pay commission as a percentage of total Gross Margin (no more than 25%). This way your incentive compensation is manageable and predictable and you leave yourself room for profit. In bad times, you and your team will share the pain and in good times, you and your team will share the wealth.

As mentioned above, we have an excellent webinar on http://www.msppartners.com entitled “Variable Compensation Plans for Managed Services Businesses.” that explores this topic in significant detail.

I read your article with interest, as one of our New Year’s resolutions is to do some reworking of our sales team compensation plans. I agree that as an MSP making contracts more “shiny” for sales staff is a necessity.

I’m interested in your, and your readers’, thoughts on rolling targets over from quarter to quarter. What do you do if sales staff miss their targets one quarter, then achieve them the next? Do companies still pay the full commission, average it out, make them wait, or something else?

As business owners it hurts to pay commission when we know the good month/quarter is only barely paying for the loss in the previous one. But it’s also really important to keep our sales staff motivated to perform. I think this will be an especially common problem to come up against in the next 12 months & appreciate your thoughts.

Thanks for your thoughts. I agree that point 2 provides some challenges to MSPs. While not easy, here are a few more thoughts:
1)Cancelation fees are a reasonable “ask” in negotiating your contract. Explain cancelation fees to your customer this way – I have real upfront costs that I recover through the length of the contract (s/w licenses, staffing costs, etc.). If you cancel before the end of the contract, I will end up eating those costs. While most business owners won’t like a cancelation fee, they will understand why it is necessary. You could top this off with, “of course, you’ll be so happy with our services that you will never cancel!”

2)Find alternative ways of financing the upfront commission – I mention one creative way above (allocating the first month of a contract to commission), but other options could include borrowing against your accounts receivable, or raising more capital. Not easy answers, but certainly options.

3)A more middle ground approach is to pay a portion of the contract up front and pay the remainder on a monthly basis. While this takes some of the “shininess” away from your Managed Services contract, it will alleviate cash flow concerns.

All that said I like this post and it got me thinking/wondering if there are creative ways for our company to offer option 2 without really stressing our cash flow. Thanks for your thoughts.