A Guide to Fee Models for Fractional Executives - With Focus on The Fractional Sales Leader
Fee models for fractional executives is one of the most talked-about topics in fractional communities. And it makes sense, as there is no one-size-fits-all. These fees have an art and a science to them, a balance between multiple factors, and an element of as-high-or-as-low-as-desperation-takes-you. And that is not too different from the permanent job market: there are currently job postings for a VP of Sales on Indeed making $80k and $500k+ a year.
But numbers aside for a moment, what are those factors to consider? Factors that hold true for both the client and the executive so that they also provide a more unbiased way to determine a fee agreeable and beneficial to both.
1. Fixed vs. Variable: Similar to traditional sales compensation, do you want to pay (or get paid) on a (1) pre-determined basis, (2) based on the outcome, or a (3) mix of both? In most discussions I have been involved in, the answer really depended on how well both parties could foresee the outcome.
Tasked with scaling a business from $5m to $10m in revenue tends to come with a lot of historical clients and deal data and an upside opportunity built into a variable model when sales go beyond $10m. That outcome is definitely easier to predict than in a pre-revenue situation with unproven pricing, process, and messaging.
2. Time vs. Value: Is the foundation used to determine the fee the time the executive invests? Or is it the value they deliver to the business? Time, either in hours given to the client in the contract or as an estimation for completing the project, might be the easier argument to agree on.
Value sometimes is in the eye of the beholder, though incremental sales revenue delivered is undeniable. And beyond immediate, tangible revenue, when value is the importance, the worth, or the usefulness of the deliverables agreed upon in an SOW, it might just be laying the foundation for all future growth, way beyond the actual assignment. This intangible value can be made visible, too.
3. Project vs. Ongoing: If the client needs an executive to do an assessment or to build a sales playbook, that is typically project work and can be charged as a project fee for an agreed-upon scope of work and deliverables. However, if the client needs an executive to provide ongoing leadership and coaching to the sales team, then that engagement should be structured as ongoing and open-ended.
This latter scenario also assures the client that the executive is available for the long run, and it gives the executive the perspective of a longer engagement. And that has an impact on the fee.
4. Complexity of the Assignment: I always contrast a team of 3 sales reps in the Midwest vs. a global team of 700 in over 20 offices around the world. The latter is certainly more complex and requires a skill set that is more expensive. Complexities of a fractional sales leadership assignment can be the result of geographic and cultural spread, number of team members, diversity of products, target markets, or personas, and a number of other factors.
Sometimes, it is the result of the timing when the executive comes in: is it a greenfield situation pre-revenue, or has the business gone through several cycles of hiring and firing sales reps?
5. Team Members or Not: With team members, you don’t want to create the impression that the meter is running every time they call the fractional sales leader with a question or an issue. It will limit the executive’s effectiveness in leading them, and it can negatively impact their ability to assimilate into the company and be viewed as a true member of the team.
6. Size and Age of the Client Business: While complexity, value delivered to the business, or the experience of the executive is often unrelated to the client’s size, there is a general sentiment towards charging an SMB less than a Fortune 500. That is based on an assumption of what they can afford or not.
A fractional executive is an investment, and most investments a business makes (rent, equipment, materials, etc.) are not necessarily priced based on company size. As far as investment in people goes, an owner or founder can sometimes use equity to lower the upfront cost. Whether a fractional executive is open to the idea is an individual call.
7. The Need for Seniority and Experience: Back to the previously cited example of a team of 3 sales reps in the Midwest vs. a global team of 700 in over 20 offices worldwide. Before even engaging with an executive for the first time, the client needs to clearly define what experiences are required to make the executive successful, and then expect to pay for those and only those experiences. Otherwise they either overpay or settle for suboptimal talent.
All these factors come with an art and a science. Discussing them openly between client and executive helps not only to determine a fee structure that is advantageous for both, it also creates a clear understanding of the current status of the business and sets clear expectations for the assignment.
I believe there is not a one-size-fits-all when it comes to the fee structure. Even the more commonly accepted beliefs, such as "only pay for results" or "pay by the drink" need to be closely reviewed and discussed in the specific context of the assignment.