When is it smart for salesforce compensation to include stock options?

Answer by Dan Walter (original question on Quora) Great question, and one that is getting more attention lately as more sales forces are evolving from selling things with a quick hit of revenue, to selling services with long tail of revenue.

Traditionally sales people have been viewed as "coin-operated". This has meant they sell something, the company gets paid fairly quickly and the sales person gets their share.  There may have traditionally been a long-term component, but it was small... relative to annual, or even shorter, incentives.

Evolving to an "annuitized sales model" requires taking a new look at sales compensation. A $100,000 sales that will be paid over 5 years requires a different pay program than a $25,000 sales that is paid this quarter.

Stock options and other forms of equity compensation are designed as mid-term and long-term incentives and retention devices.

  • Do you sales processes take a very long time? Think in terms of years, not months. If so, stock options may be a good tool.

  • Does your sales process include selling a small level of services today with the goal of building the level of services over a long period of time? If so, stock options may be a good solution.

  • Does a sale at your company take months or years to get fully paid (ex. 3 years contract paid in equal monthly installments)? Stock options may also work in this scenario.

  • Are your "sales people" really some hybrid of marketing, relationship manager and sales pro? If so stock options might make sense.

  • Are your sales people also professional services people. Essentially consultants who are "rainmakers"? This can be a great time to use stock options.

  • Are your sales people selling "stuff"? And, are they paid a good commission on that stuff, based on some level of profit margin to ensure the company also gets its share? This may NOT be a great place to use stock options, unless it is a bigger piece of your culture and compensation philosophy and used as a form of communication to tie everyone to common goals.

Figure out where you are (or where you want to be) relative to the information above.  Then take a look at the answer provided by Jason Lemkin in this thread as it also has some important considerations.

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