Tag Archives: Calculate

How Do You Pay Sales Reps? Two Options

Situation: A CEO is considering two options to pay sales people – base/draw plus commission, or no base/draw and larger commission. What do other CEOs find most successful? How to you pay sales reps?

Advice from the CEOs:

  • Align the sales incentive plans to company objectives. Two examples were offered, one of an aligned system and one of a dysfunctional system:
  • The aligned system. Sales reps are 100% commission (plus expenses) with no caps on income. They are measured by two sets of metrics. To keep their jobs, they have to achieve a minimum of 85% of their revenue goal. Fall below this and the rep is out the door. However, commissions are calculated on the gross profit achieved on sales, and reps are provided with software to calculate GP and commission. This company is the most successful in its market.
  • The dysfunctional system. Sales reps are paid a base plus quarterly commissions calculated on achievement of revenue goals. The net result was that reps had no incentive to preserve gross margins. The result was constant conflict between sales and finance. The situation only started to improve as reps’ commissions were converted to a combination of revenue and margin.
  • The Key Issue: What is the role of the rep within the sale? Is the rep a door opener or a closer? What percentage of the close is attributable to the rep? In a complex or staged sale, allocate commissions based on contribution to the close. Reps who can’t close are not as valuable as those who can.

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How Do You Value the Stock of a Private Company? Three Factors

Situation: A private company has not issued stock options in over 6 months. The business press highlights concerns over appropriate valuation at the time of option grant. How do you value the stock of a private company to assure that option awards reflect proper company value?

Advice from the CEOs:

  • Decide on the objectives of your valuation exercise. These may include:
    • A credible valuation to protect the Board from challenges over option valuation.
    • A calculation that the company can use quarterly or semi-annually to assess company valuation; possibly something that can be done internally on a quarterly basis, with independent validation annually.
  • Given that your concern is option valuation and protection of your Board, they only clean way to do this is to have an outside party perform your valuation. Internal valuations are subject to challenge. Look for reputable CPAs that specialize in private company stock valuation and get quotes from several for initial valuations plus follow-up valuations in 12 months. You may anticipate paying a fee of $12,000 to $15,000+ for this service.
  • There are issues that you will want to address in your valuation process:
    • A valuation must have a supportable rationale and demonstrate consistency of methodology so that valuations will be performed on a comparable basis year after year.
    • You want to see consistency between valuations with your annual financial audits which will reflect company performance.
    • There are at least two models that you may follow – a hard model and a soft model.
      • The hard model is a one-time valuation based on your financials. This may include historic performance, as well as forward-looking ROI.
      • The soft model is based on operational and risk assessment.

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