Cash Flow: The Power of a successful compensation, commission, referral and Partner plan
By: Cori DiDonato, Owner, Silver Tiger Consulting
A successful and cohesive compensation plan, referral & commission structure, and partner program can dramatically increase profit for a company in a relatively short amount of time. If done right, it can align external channels and increase workforce moral. If done wrong, it can set up employee conflict, legal woes, and competing goals between possible partner referral sources and decrease employee and contractor morale.
Most of our time is spent helping product and service providers in the software, construction, real estate, and health and wellness industries increase profitability, plan for future company growth, and create an optimal exit strategy for the owner(s). Many of these businesses have at least some form of external referral source or partner program that regularly generates clients and leads. Some of them have inherent legal issues that need to be worked out before entering into or creating external partnership and referral source programs. For the purposes of this article, any person or entity you’d need to provide a 1099 for if you pay them, pay a fee to via credit card for referrals, and not pay employee compensation to is considered an external source. For those that do have legal conflicts, we frequently work with a business’s attorney specializing in this area when creating a program.
This article assumes that an organization has already done the work to determine their pricing strategy and has aligned their product and service pricing already to this strategy. Before creating any type of commission or referral fee structure, an organization should have an idea as to what percentage of the sale from a product or service can be used in implementing the initial plans described in this article.
Formalizing and leveraging the current informal referral and partnership network into more clients and happy referring partners will not only increase the value of your company if you go to sell it, but it will increase your immediate revenues and profit.
The first step in creating a comprehensive plan is to differentiate between these 3 groups of people:
1. internal employees providing the actual service & product, or servicing customers by entering their orders and estimates into a POS system (point of sale system)
2. business development and sales staff bringing in and closing on new leads, generating additional business from current clients, new referral sources, and new customers, and
3. External referral and partner sources
Internal employees that are primarily taking orders and servicing clients should be paid hourly or salary depending on their job classification. They will spend most of their time taking in new orders generated by marketing, advertising, business development staff, and sales efforts the business or business’s partners invest in on behalf of the entire company. In many cases this type of employee will have specific hours or shifts they are required to cover to meet client needs or advertised hours of operation.
In a small business, growing or hiring staff whose primary job function is going out and identifying new business opportunities, and closing on new leads is crucial as the business grows. Early on in smaller businesses, the only person doing this is the business’s owner or owners. To grow or hire this type of staff person, which often has a strong commission element in his or her compensation plan, you must be able to differentiate between entering orders & servicing clients during a normal “shift” and the business development and sales activities that should generate a commission. It is important that as a business owner you set the expectation that answering the phone and entering an order during your paid shift because of an advertisement the business is running is not grounds for earning a commission. You may decide to set up productivity goals or other specific targets that result in a bonus around this type of employee activity in the future, but setting it up as a commission based activity rarely works long term and creates conflict between staff functions that becomes apparent to customers very quickly. Also paying this type of staff only commissions runs in direct conflict with most state employment laws, so beware and consult with an attorney if you have questions about the labor laws for your state.
Secondly, it extremely important before you grow internal business development and sales staff for whom you plan on paying commissions to get your external referral and partner sources squared away.
Once you have separated out these three overall groups identified above (1. internal employees entering orders and servicing clients; 2. Internal business development and sales staff generating new client business, referral sources & partners, and closing on referred leads; and 3. external referring sources and partners), it is important to start fine tuning how you handle and pay (if appropriate) external referring sources. This is where a lot of established businesses start to have issues- they do not have this part of their business ironed out which in turn makes it extremely hard to grow an internal business development and sales force. The internal business development and sales force must know what is available for incentives to external parties so they can successfully work with and cultivate these types of external referring sources and partners.
To fine tune your external referring and partner sources, you need to determine whether they are handing you leads that you still need to close (referral sources) or if they are handing you leads that are already a “done deal” because they too are actively working on the project with the client (we call these partners). You need to identify what if any legal rules govern paying out referral fees, providing gifts, or awarding loyalty “points” to these groups for these types of activities. The final step on this end is to determine how frequently you’ll pay out referral fees, award “gifts” or points, or pay partner fees where applicable. Early on, it is pretty common to pay out or reward as soon as you get paid from the mutual client. As a business grows into more than one or two partners, this becomes increasingly difficult and most companies move to a regular monthly schedule that can be reconciled more easily from an accounting standpoint. Having a less than monthly payment schedule typically does not work for most businesses (decreased partner motivation, harder to track and reconcile, etc.).
Taking leads from referral sources that your internal sales staff still need to close should be compensated at a much lower rate than being given a lead that is ready to do business with you and has already worked with a partner to identify which of your product or services will work for them and how they jointly will use your product or service to improve the client’s business, home, etc. (partner source). Many companies successfully introduce a policy of giving a one-time gift card, gift, loyalty rewards points, or additional x% off your next purchase for referrals that are warm leads (i.e. not given by a partner).
Having a different payment/award structure for these two sources leaves enough room to pay out commissions to an internal sales staff that is ultimately closing on referred “leads” as opposed to taking orders from partners.
I see businesses set up huge conflicts right from the get go in this area because they mistake large lead referral sources that should be giving leads to your internal sales team with partners that have the ability to provide clients ready to go (i.e. all you need is the client’s credit card or payment and in many cases the partner may be a reseller and is actually paying the mutual client’s bill from you).
In many industries, these two referring/partner sources frequently work with each other. A plan or system that rewards all these sources working towards creating a successful outcome for your client will have much more success and generate many more closed deals and new referral sources for all those involved. A plan that only rewards one of the sources or mistakenly provides greater rewards to the referral source that provided the least amount of help to your client will often have the most issues and least financial success.
And lastly, once you have worked out how you fine tune and pay external referral sources and partners, the final step is creating a compensation plan that includes commissions for internal employees primarily responsible for business development, generating new customer sales and/or closing sales from referral source leads. This team would handle the leads that are not yet ready for a sale when they are introduced to your business. Depending on your product or service, these staff members may also be frequently out in the field generating new clients/referral sources directly and assisting referring sources at their own client generating activities. If they are rewarded adequately for bringing in new referral sources and helping these sources bring in the actual end client, you’ll have more success with less cost.
We at Silver Tiger Consulting spend a lot of time fine tuning and developing compensation plans, commission structure, partner programs, and referral source programs to better align with a company’s revenue and profit goals. We also work with a company's payroll service to ensure that all plans are implemented in the payroll system. We can even set up a new payroll system if a company has outgrown their existing service. All successful plans, however, start with the basic framework and progression outlined above. For additional information on how Silver Tiger Consulting can help your business succeed, please visit our web site at http://silvertigerconsulting.com or contact us at firstname.lastname@example.org.
Owner and Founder, Silver Tiger Consulting
*Note- Silver Tiger Consulting does not provide legal advice, so please consult with an attorney familiar with your industry and type of business in the states you operate prior to implementing, creating, or entering into a partner or referral program or setting up your own compensation plan involving commissions. Some industries (Construction, Legal, Real Estate to name a few) are heavily regulated as to who and what they can even pay a referral fee. There are also many applicable labor and compensation laws governing to who and how a company can pay out commission compensation. Much of this is also regulated at the state level, so rules and laws between states can also differ greatly.
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