Business Development Commission Agreement
A business development commission agreement is an agreement between a company and a business development representative.4 min read
2. Setting the Commission Rate
3. Factors to Consider
4. Team Compensation Plans
A business development commission agreement is an agreement between a company and a business development representative. A business development representative is a highly-skilled salesperson who can be difficult to recruit and will expect high pay rates and incentives due to the nature of an infrequent and inconsistent sales cycle.
Designing compensation plans for business development representatives can be difficult. These representatives can require six months to a year to cultivate relationships and close the deal, depending on the kind of business. The existence of a long period before they receive a payout will often cause the representatives to ask for higher base salaries.
Building a Business Commission Agreement
In order to build a business development commission agreement, the following should be considered, in order to benefit both the business and the business development representative:
- Set realistic goals that focus on quality over quantity. The new business development representative is expected to cultivate the future client base of the company, and good clients are better for business.
- Determine a target compensation level that is based on experience, seniority, and expected results.
- Establish a base salary that will provide a level of security to the business development representative and will encourage the work ethic the employer expects.
- Add performance incentives in the form of commissions and bonuses.
- Include final considerations to balance risk and reward.
It should be noted that there are problems that come with a commission based agreement, including the following:
- Business development representatives tend to focus on the percentage of the sale they will receive.
- Recurring accounts that continue to produce will create a sense of entitlement.
- Percentage commissions are difficult to change once they are established.
- Performance improvement may decrease.
Setting the Commission Rate
The business should review the current gross profit margin and net profit margin to determine the appropriate commission rate. The future margins should be considered as well. Growth and related expenditures should also be taken into account. As your company grows, so do overhead costs. Commission rates should be conservative at newer companies since it is likely that margins will decrease over time.
To protect the business and provide proper compensation to the business development representative who is tasked with bringing in new accounts, the plan should:
- Meet the business goals set yearly.
- Adjust to meet the changing market conditions.
- Offer incentives for the representative to improve.
- Be customizable to meet and grow the professional goals of the representative.
- Keep the representatives focused on the goals of the business.
- Allows for adjustment as the business experiences growth and gross profit and net margins change.
Factors to Consider
In the first year, hiring a new business development representative is an investment. The goal is to assess their ability to secure new clients while also retaining existing clients. The first year may not result in a huge change in your client base, but it will give a better picture of the rep's abilities and how the commission agreement will need to be adjusted for the next year.
Due to uncertain production, offering financial security gives the business development representative the ability to focus on the requirements of the position. For the first year, an eighty percent base pay is typical. Then, as the sales begin to close, the base rate can be reduced to sixty-five percent with an increase in commissions and incentives. For the employer, if after a year the sales pipeline is not producing as expected, they should reassess the abilities of the business development representative.
Milestone pay may be used in cases where sales take years to complete. Milestone pay recognizes an increase in the probability of a sale closing in the future. Milestones should be based on true measures of improvement and not on the number of meetings that have occurred. Initial contract signing, trials, or a business percentage being transferred to the business development representative's company are examples of milestones.
Team Compensation Plans
Creating a bonus for the sales team as a whole that is based on performance will help motivate the team to reach the specified goals. Each team has their own goals they want to achieve, but developing a plan that pulls them together will promote company-wide collaboration to reach the goals put in place.
This will also provide a way for the new business development representative to see how they can reach their own financial goals. The new representative's commission plan may provide a basic survival rate, but adding in a bonus that brings them to a higher preferred income rate will promote improved performance.
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