The Cost of Asset Raising and Salaries
Often when we meet potential clients, we sometimes talk about salaries for business developers. Any B2B firm will have a sales team and it is important to get the mix between base and bonus correct. It is a very delicate balance, because if the economics and rationale behind the economics are wrong, then the house of cards will fall down.
I am sure everyone has read the salary surveys and have been somewhat dismayed; either as an employer or employee. However, the compensation scheme doesn’t need to be that difficult.
As a business owner, I have found that a lot of the economics are not up to me. I would love to pay everyone exorbitant salaries and make a lot of money in the process. However, it simply doesn’t work like that. If you charge ‘x’ for a service and need a margin of ‘y’ to make it worthwhile, then there are limits to what you can afford. Often times, I don’t have a choice when it comes to salaries because I am bound to the business model. The only comfort I have is that I am not alone. All business owners face the same challenges along the whole Human Resources value chain. If I raise the salary for one team, then I need to raise the price of the service, be less profitable or deal with the plethora of issues I have on every single aspect of the business.
I am content that I am not alone in the slightest.
When it comes to other fund managers asking me about salaries for Business Developers, I can only respond with my own take, and it may or may not be appropriate!
The first thing I would note is the risk vs. reward.
Appreciation of the maturity and complexity of the business is crucial. If this is a hard sale, i.e. The firm is relatively new or the business is sound but going through a difficult period, then the risk that a seasoned business professional will assume when taking up the job will probably merit more upside than would normally be the case.
If the firm is large, with a lot of product and stability, then the risk/reward ratio can be lower. In other words, higher salary, smaller bonus. Mono-line fund companies are naturally more risky and the salesperson is concentrated on one product (just like the fund manager). Taking this sort of career risk has a value because if the fund becomes unsalable for some reason, then the business developer will have nothing to show for several years of hard work and will need to justify that to the next employer.
The second thing is the mix between base pay and upside.
I have heard a lot of business developers claim that they need at least $200k base in order to survive. This request automatically shuts them down from a lot of opportunities because the math just won’t add up.
Say for example that a fund charges 1% management fee. That means that the BD needs to raise $20mln per year just to pay for his place (200,000/0.01)
However, this escalates quickly!
Add in healthcare and taxes, call it $25mln
Add in overhead (desk space, conferences, etc.), $50mln (easily)
Add in the sales cycle, which is typically 12-18 months, $75mln
Add in your profit margin to make the business whole, say 20%, $90mln
Add in all the BDs that failed to deliver… then you have to repeat this process.
You get my point (this is also why Murano exists since we help with the costly identification process).
On the flip side, lets hope that the allocators stay on for more than a year, and then the firm starts to claw it all back. In other words, this is a long term game.
My math might be wrong, and I would love to get some feedback, but from this optic it is a frustrating and expensive endeavour.
Most importantly: The higher the base, the shorter the rope.
We all want transformative business developers that will work hard and bring results. However, the more a manager pays, the more pressure there is on a business developer to deliver. A high base means that there is less room for mistakes and less tolerance for failure.
In conclusion, I think that this is where a lot of managers make mistakes. This industry has been poisoned by straddling the idea of 3rd party marketing on one side, where contingent (exorbitant) payment is the norm and has left many managers empty vs. in-house sales. Although in-house sales is expensive on the front end and sometimes deceiving, there is no comparison. No one can sell your product like you can in-house, but the economics need to add up for everyone involved.