SalesCompInsights

When it comes to sales compensation, business services firms pose a unique challenge.  By business services firms we mean companies that provide technology implementation, design, maintenance, printing, temporary personnel, etc., to other firms.   Unlike a product company that sells “widgets,” a services business essentially sells its people.   Similarly, the service is often an extension of the salesperson’s relationship with the customer.  Typically it’s more difficult for services firms to differentiate themselves, and these companies are less likely to experience the waves of business common to product firms, where the sales organization enjoys a growth cycle from the launch and subsequent momentum of a new product.

Maintaining and growing your existing client base is certainly going to have a lower cost of sale than acquiring new customers.  Significant time and attention should be paid to cultivating and maintaining existing relationships.  Unfortunately, the evil twin of relationship management can be  complacency; less focus on new services, limited ability to increase prices and insufficient acquisition of new clients.  We observe four key sales compensation issues within business services firms looking to re-ignite growth:  

• Commission on margin:   In a business where the profitability of a deal or customer can vary so significantly there may be a strong desire to pay on margin.  The counter argument is that “delivery,” not sales really influences the profitability of the deal.  If the delivery team provides the contracted service for a lower cost than estimated the deal will be more profitable.  Less efficient, less profitable.   For us, the key considerations are the role of the sales person and how much pricing discretion is available.  Paying commissions, or bonuses, on margin will certainly engage the rep in the profitability discussion.  It also encourages them to stay close to the delivery of the service; potentially a good or a bad thing based on the priorities of the role.  From a pricing perspective, the more discretion, the stronger the argument for some kind of margin component.
• Revenue versus bookings:  Revenue proponents contend that the sales team shouldn’t get paid until the company is able to invoice the customer (or in some cases until the company receives payment) and paying on revenue encourages the salesperson to better manage the relationship.  Bookings advocates point to a similar rationale as not paying on margin and like to point out that bookings measures encourage both new clients and new business within existing relationships.  Once again we’re back to the question of role:  what is the sales person being asked to accomplish?  What are their priorities and if we’re asking them to change, why? 
• Quotas:  We observe many business services firms where quotas are used for performance management, but are not part of the sales compensation program.   Linking quotas to incentive pay is a significant tool available to drive growth.   These performance expectations directly tie the productivity of the sales team to the business plan.  Further, within sales organizations historically paid on revenue, new business quotas can represent a major cultural shift and drive additional changes across the organization.   One cautionary note; the potential change brought by the introduction of quotas, means getting the quotas “right” should not be trivialized.   Revenue based quotas have their own issues, but setting a bookings goal for the first time requires careful thought and preparation.  Unrealistic or unachievable quotas can have an incredibly negative impact on the organization.    
• Sales expectations for delivery teams:  Within many organizations the role of the deliver team is to provide a high quality service and ensure the client’s satisfaction; can the customer be used as a “reference.”   Maybe there is a referral bonus available or even a SPIFF.  But in other organizations, offering new services to the client is part of the satisfaction equation.  Scott’s recent experience with AAA is a perfect example (Sales is Service).  For companies that believe in the service they provide, we think it a mistake to not at least consider the role of sales incentives for the delivery teams.  The incentive might represent a smaller portion of total pay relative to other priorities, but its absence often represents a missed opportunity.  Organizations that introduce a sales incentive need to train team members on their role in the sales process, as well as how to identify opportunities.      

Beyond the question of sales compensation, role design and account assignments play critical roles in the management of a business services sales team.  Effective sales compensation plans are predicated on clear roles and selling priorities.  Questions about how services salespeople should spend their time must be answered before any sales compensation decisions are made.   In a recent survey of incentive plan participants within a services organization, over 30% of the field said their incentive plans are not aligned with their roles and over 40% said they weren’t sure or don’t believe the plan supports the priorities of the business.  As sales compensation designers, numbers like that are like a big red flare, regardless of what industry they represent.

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Extinction of the Sales Rep?

Like the internal combustion engine, direct selling persists despite technology and cultural shifts suggesting its demise.  Certainly, many of us in direct-selling roles consider much of today’s technology critical to our selling success.  But the fundamentals of sales success are as old as the wheel.

Notwithstanding there are bold pronouncements of how the internet will significantly marginalize the direct selling role.  Selling Power magazine publisher Gerhard Gschwandtner goes as far to predict that in nine short years only 3 million of the roughly 18 million salespeople employed in the U.S. need report for duty.  “In a digital age, every part of the sales and marketing process can be automated,” reports Selling Power.

The article goes on to say that increasingly, customers will make decisions based not on slick sales demos and well-timed follow up calls but on the advice of peers through social networking.

If you’re a salesperson reading this, you know there’s always been a social network, and you’re rather certain you’ll always be able to get a job as a sales professional.   Sure, customers get a lot of information that wasn’t available before.  You do also and use it to your advantage.

More at issue is how the sales compensation professional accounts for these multiple channels of influence relative to that of the salesperson.  One director of compensation for a consumer products company explained, “Customers used to rely exclusively on the sales rep for a lot of the information they now get over the web.  Our reps don’t have the same degree of individual influence (on customer buying decisions), but we pay them like nothing’s changed.”

Indeed, a recent study by Deloitte & Touche suggests that most companies have not found the right way to pay for sales performance, with significant implications for sales productivity. 

One would think we’re not prepared for this new age.  Like having bought an electric car and finding its plug incompatible with your garage electric socket.   But in the world of sales comp we’re convinced that all seemingly new trails have been previously trodden.  So we refer to our shelves and dust off the volume on “Alternative Channels.”  Not surprising the lessons in this volume seem particularly apt to the likes of Twitter and Facebook.

It goes something like this:  rep, having spent all available selling time with end users, must now shift some time to those “channel partners” influencing the customer through alternative channels.  Do we pay the rep differently for this shift in behavior?  Of course we do.  The solution could be as simple as measuring all sales volume in a particular, geographic territory, but paying at a reduced rate in recognition of the greater efficiency (and incremental cost) associated with the alternative channel.

This is a simple example.  Your reality may be a bit more complex – e.g., channel partner influence spans multiple, direct-sales territories.  At a minimum you may be looking at a less-aggressive pay mix to accommodate a job role with less direct influence and a higher skill level.  Or maybe performance measures not tied to transactional sales volume.

Case in point, GlaxoSmithKline reported changes to compensation for its direct sales reps, away from prescription sales volume and toward customer feedback, knowledge of the business and overall contribution to the business units they serve.  While at the time of this writing we can’t be certain GSK’s changes come in response to the massive number of tweets, posts and walls related to its product, we’re pretty sure the model of putting armies of direct sales reps on the ground of healthcare facilities, loading them with free samples, pens and bagels, is long in the tooth.

And while the industry overall has pared back considerably the number of direct selling jobs over the past three years, most firms are now hiring – GSK posted ten new sales representative jobs in the last 24 hours.

In fact, many companies across multiple industries appear to be on a sales-rep-hiring binge.   Far from being on its way out, the direct sales rep is in demand.   Three-quarters of the respondents in SalesGravy.com’s annual survey of sales hiring trends say they plan to hire salespeople in 2011.   A tech client having returned from her annual sales meeting last week said over 40% of the audience had less than 12 months’ time with the company.

Are we in a bubble-building mentality, soon to wake up and discover we have too many salespeople for the work required?  In all respect to Mr. Gschwandtner, we think not and hope his prediction is way off base.  The direct sales rep of the future will succeed in part by leveraging massive amounts of information that until recently didn’t really exist.  It’s a different, more complex job role though, and companies hoping to reap productivity from these jobs must adopt their sales compensation programs accordingly.

Know Which Investments Will Pay Off

As referenced earlier on this site we recently hosted a web session with Steve DeMarco, VP Worldwide Sales at Xactly, and polled the 500+ registrants for their views on sales force investments.

Not surprisingly given recent economic trends, many companies are adding headcount, training those resources, and arming them with the content and collateral to help them be more successful.

Interesting, it was additional headcount or training that over 20% of the respondents found did not provide meaningful return on investment (ROI).

The good news for companies making or contemplating investment in the sales force is that many folks appear satisfied with the return on such investments. 

Whether you’re satisfied or not assumes some mechanism for tracking your ROI in this area.  Clients frequently ask how they measure ROI in the sales team.  Simply, ROI is the incremental gain in sales from each incremental dollar spent on the sales team and various support mechanisms.   More complex is the interpretation in short-term trends (“we’re spending more as a percent of revenue this quarter than last”) and competitive benchmarking (“we spend 7% and our competitors 9% — is this a good thing?”).

Making sense of data derived from sales force ROI analysis is a little like fixing your dishwasher – seems simple at first but you can quickly get in over your head and have nothing to show for your effort.  Our advice here is select one or two measures that address what’s on the mind of your executive team (related to investments in the sales force, that is).  

The CFO of a medical device distributor told us recently that he asked his head of sales comp why the company’s sales comp expense is increasing when revenues are flat.  The sales comp head apparently replied, with a somewhat blank stare, “Let me get back to you on that.”  The executive told us that was about three weeks ago.

This is a big topic with big implications.  Stay tuned for examples and cases of measuring ROI on sales investments and the implications for sales incentive design and program management.

Flexible With the Course While Staying True to Plan

Joe Glenn has been managing field-based and inbound-phone salespeople for over five years.  During that time his company, specializing in communications and computer-services, measured sales performance on a product-unit basis.  The approach is common in retail and consumer-sales environments, and can be effective for driving transactional behavior from salespeople.  Where the unit-based approach falls short, though, is on goal alignment.  That is, the sales organization can exceed its unit goals while the company misses its revenue target.  In many such unit-based incentive plans, reps focus on those products they can most easily sell without appreciating the financial consequences to the company.

Changing a sales force’s incentive plan can be dicey stuff, particularly when the company adopts new measures of performance.  In Joe’s case, not only did he have to onboard a new measure, but each rep would carry a quota and minimum performance standard.

“We have a very flexible, adaptable sales force, which makes annual changes to the sales comp plans relatively straightforward,” said Joe, who about one year ago started sharing with his sales teams the revenue-plan concept.  “They were on board – it made complete sense to them.”  New goals and a goal-setting paradigm raise the stakes, however.  “Salespeople want to know the goals are reasonable and ultimately, do-able.”  Without the benefit of historical data, salespeople didn’t really know whether their revenue-based quotas were in line.  Adding to the anxiety the plan featured a 75%-of-quota threshold.

Creating quotas was another issue.  Joe’s colleagues in sales operations used the company’s billing system as the source for transactional revenue data, a formable task that didn’t come on line until December.   The new incentive plan was slated for rollout the following month.  Joe was forced to use a limited set of historical data for setting Q1 quotas.

The company launched its new plans during the final weeks of December 2010.  Early into January, salespeople, checking their progress against quota on a daily basis, were becoming concerned.  For most reps, their performance was trending well below where they needed to be to reach the threshold, and earn incentive pay.

Rather than waiting until quarter or even month end, Joe took action.  He and his operations colleagues dove back into the data in search of assumptions that, given the benefit of hindsight, might be off.  

The prospect of adjusting quotas mid-cycle is typically fraught with issues.  While in principle Joe believes an organization should stick to its goals, the revenue quotas were new, and he couldn’t risk the organization having a poor Q1 – a likely scenario should the salespeople disengage after perceiving they couldn’t hit the threshold.

“For the quotas to be effective, we had to be open to regular course corrections,” Joe says.  “This could not be a ‘set-it-and-forget-it’ approach.”  He used a transparent process with company leadership to keep them appraised on the evolving quota-setting methodology.  As more data became available, Joe revised his assumptions.  This included expectations for optimal business mix at the assignment level, and factoring customer churn into a four-year, revenue-per-unit (RPU) projection for acquisitions, where discounted monthly recurring revenue in the first year gives way to more typical RPU rates in Year 2 of the contract.

Joe also added a feature to the plan threshold by including a relative-ranking threshold by market.  Threshold would now be either the 75^th percentile performer in each market group, or the absolute approach (75% of individual quota), whichever was lower in the period.  This tactic provided a reality check to performance in the greater Kansas City market, where unusually harsh weather hammered field sales efforts.

While January revenue results came in below even the revised plan number, February’s pipeline is strong, and Joe projects a record Q1.  His sales teams viewed the revised goals challenging but reasonable, and after shaking off the initial anxiety, set out to beat them.  From leadership’s perspective, the additional analysis and revised goals provided a level of granularity that helps each salesperson focus on the right mix of business.  Reps are selling smarter, and thinking more long term.

One can argue that if the company hits its revenue plan, which in Joe’s case appears very likely for Q1, the course taken to get there doesn’t really matter.  Joe will tell you his approach of staying flexible, transparent and course correcting as he goes has everything to do with a favorable outcome.

Joe Glenn is a director of sales for a communications and computer-services company serving California, Kansas and Missouri.

By Elliott Scott, NewSigma

“It’s not rocket science” is one of the great clichés of incentive plan design.  For the most part it’s true, and when incentive plans start to look like the work of rocket scientists, it’s a good bet the sales force is not on board the spaceship…and may be at risk of alien abduction (or at least poaching by competitors).  But for companies that sell outsourcing services, the challenge of designing a simple and effective sales incentive plan can seem as daunting and unlikely as the safe return of Apollo 13.

The Fundamental Challenge

Incentive compensation in an outsourcing sales environment inolves a fundamental challenge: 

On the one hand, the sales talent and type of sales effort required demands a strong, immediate incentive.  Selling a large, complex, deal to a new customer, possibly based on a new concept or technology, which may significantly disrupt the customer’s business (on the way to enhancing it), is “missionary selling”—hunting of the most challenging sort.  Attracting and motivating this rare sales talent requires risk, very high upside earnings potential, and strong line of sight.

On the other hand, uncertainty regarding the ultimate value of the deal at the time of signing creates a serious risk of misalignment of incentive payments and the real value of the deal.  (Remember Enron?  They sure looked like rocket scientists to me.)

In my experience, every company selling outsourcing struggles with how to pay their sellers and account managers.  There is seldom a consensus among sales, finance, and HR that “we’ve got it right.”  The arguments over whether the plan is too “sales friendly” or too “CFO friendly” can reach a fever pitch.

No company wants a cumbersome plan, but the challenges of sales compensation plan design in outsourcing environments generate a dizzying array of complexities:  NPV calculations, profitability modifiers, contract length modifiers, deal decelerators, clawbacks, milestone payments, draws, commission pools, complex crediting rules, exception review boards, and deus-ex-machina discretionary adjustments.  It’s one of the few industries where the number of plan document pages routinely exceeds the sales headcount.

Questions to Ask

The plan design choices that each company makes can be as unique as the deals themselves and should be informed by (a) the nature of the outsourcing (e.g., asset acquisition vs. managed service, commodity vs. proprietary technology) and (b) the market position and culture of the company and sales organization.  But the questions that outsourcers need to ask along the way to developing their plans are quite consistent:

Pay Mix and Upside

Questions:  How do we (a) provide upside earnings that are appropriate for very large high-value deals, while (b) maintaining cash flow for the seller over a long sales cycle with few deals in the pipeline at any time?

The frequency of deals and payments under the plan should inform your answer.  When you analyze how much a seller will earn from a very large deal, consider the likely frequency of those deals.  A $300,000 incentive payment may not be excessive if it is unlikely to be repeated for several years.  And if payments for deals are stretched out over one or more years, cash flow may be smoother than deal flow, making draws and guarantees less necessary.  Nevertheless, it is probably prudent to have some provision to protect the earnings of effective sellers on an exception basis during a long sales cycle on an important deal.

Performance Measures

Questions:  What combination of performance measures balances (a) simplicity and line of sight, (b) alignment to the role of the resource within the sales and account management process, and (c) the financial and strategic interests of the company?

Typical measures include total contract value (TCV), annual contract value (ACV), contract net present value (NPV), actual revenue over a certain period, revenue growth, renewals, new customers, new products or product mix, contract length, and sales process milestones.

Unless TCV is set in stone, which it seldom if ever is, use ACV with a simple and light modifier for contract length.  Where contracts may have escape penalties, and you would like your sales people to write them in, paying on minimum contract value is also an option.  And remember that paying on actual revenue received will drive account management behavior, which you may not want from your hunters.

Mechanics

Questions:  Given that most outsourcing sales people (as opposed to account managers) are paid using a deal-based commission mechanic, the question becomes not whether to use a commission vs. a bonus plan but whether or how we should modify the commission plan to:

Introduce an element of annual goal attainment, to align sales force performance with company revenue expectations

Account for large differences in the size, length, and profitability of services and contracts

Although the revenue forecast for an outsourcing company may be predictable, the sales forecast for an individual outsourcing seller seldom is.  So tying individual incentive earnings to individual goal attainment can create a lot of frustration and under/overpayment, to say nothing of lobbying for goal adjustments.  Keep goal attainment on a team level and/or use it to determine award trip participation.  Also, don’t be afraid to use higher commission rates for more profitable or strategic services.  Although they may appear complex, they are much more easily understood and assimilated than other plan complexities.

Timing of Credit and Payment

Questions:  How much tolerance do we have for misalignment between incentive payments for contracts sold this year and the revenue and margin those contracts generate in future years?

Based on the role of the salesperson, how should we divide credit between contract signing, invoicing, customer acceptance, cash received, or revenue booked?

If we pay on contract value and true up on revenue received, how should we structure the true up process so that (a) it seldom if ever results in a clawback, (b) it does not extend payment too far into the future, and (c) both the initial estimate and the true-up calculation are as objective and consistent as possible.

Get used to the reality that in a large-deal environment, with some payment at contract signing, there will be misalignment in any given year between incentive payment % of budget and revenue % of goal.  Also, when determining the convention for estimating the value of a deal at signing, use the most conservative methodology that is reasonable.  You will save yourself a lot of trouble if the value of the deal at the true-up point always turns out to be more than the value estimated at signing.

Sharing and Adjusting Credit

Questions:  Of the many individuals who can reasonably claim to have been involved in a sale, which ones should participate in the actual commission from the deal, which ones require some recognition or incentive outside of commission, and which can be told, “thank you for doing your job”?

And how if at all should we adjust credit for deals made at the corporate level, with less sales person involvement or influence?

Remember that once you add on incentives it is hard to take them away.  Many plans for roles that are not primarily sellers become encumbered with complex add-ons that generate commission and administrative workload but do not drive behavior.  And as for corporate deals, while it is seldom necessary to pay a windfall to a seller who did not drive the deal, you don’t want a plan that discourages sellers from involving senior management.

Account Management Incentives

Questions:  How much pay at risk is appropriate for our account managers, given the selling vs. operations focus we are trying to drive?

And will specific add-on incentives for account managers drive the behaviors and results we want, or should account managers be paid entirely on the revenue growth of their accounts?

There are a wide variety of pay schemes for outsourcing account managers, from straight salary to highly leveraged plans with multiple commissions.  It all comes down to what you want your account managers to do.  Account managers may envy the high commissions that sales people earn in their accounts (because of the good account management work they do!) but if their primary responsibility is account retention and revenue retention, the pay plan should reflect that.

Beware:  It is not easy to get a consensus answer to these questions, and you can be sure the answers will be re-visited frequently.  But finding the answers that are right for each company at a given point in time, while keeping complexity to a minimum (“elegance” is too much to ask for), is the key to an effective but manageable outsourcing sales incentive plan.

By Elliot Scott, NewSigma

As a sales organization matures, a number of things can happen that make the original commission-based sales incentive plan increasingly problematic.  So it is not uncommon for companies to transition to a goal-based plan over time.  Mike Meisenheimer covered some of the related issues and options in a two-part series on the topic (http://salescompinsights.com/?s=from+commissions+to+a+goal+based+plan).  But while it is much less common for companies to move in the other direction—from a goal-based plan to a commission plan—it is sometimes the right choice.

What’s So Great About Commission?

It’s a fact of life that commission plans are more motivational.  “If I sell this I earn that” is a lot more immediate than “if I sell this, I retire x% of quota, which according to the payout table may get me an incremental 3%, 5%, or 10% of my target incentive at the end of the period depending upon where I end up on the payout curve.”  That immediacy can really drive sales results, particularly in aggressive, hunting-oriented sales organizations, which is one reason why they often bend over backwards to use commission.

When Your Goals Have No Credibility, One Option Is to Get Rid of Them

I recently helped a company assess and ultimately implement a transition from a goal-based plan “back” to commission.  One of the drivers was that the goal setting process had no credibility with the sales organization.  The plan measures and mechanics were sensible and in fact the goal-setting methodology was objective, data-driven, accurate, and surprisingly fair.  But the company had failed in making the methodology clear to the sales force and disproving the perception of a success penalty, i.e., “If I exceed my goal, I’ll earn some upside this period but I’ll be saddled with a much higher goal going forward, making it harder to earn even target incentive for some time to come…so why bother?”  Okay, while it is true that increasing sales tend to lead to higher quotas (as to some degree they should), the perception of success penalty is often overblown, as it was for this client.  Nevertheless, if the goals are not perceived to be fair, it hardly matters if they are.

The sales people fully understood that territory sales and potential were uneven, and would remain so, so any commission plan would probably favor the larger territories.  But they craved the immediacy and transparency of commission.  Even the sales people with smaller territories told us they would prefer commission.  Being good sales people, we could expect them to shed persuasive tears about how unfairly disadvantaged they were, but they made it quite clear they would rather control their own destiny than hold their earnings hostage to management’s black-box estimate of a fair goal.  (It should be noted that this was an aggressive sales organization, with high pay mix.  It recruited the type of independent, “coin-operated” talent for which commission is particularly attractive.)

The Results Are All That Matters

With some hesitation, we designed and implemented a new plan that was not in any way tied to manufactured territory goals.  We did so in a way that sought to minimize the effects of uneven territories, utilizing some mechanics that “taste like” commission but are a few steps removed from 5% of sales for everyone.  Most importantly, the new plan was simple and transparent.

When we came back halfway through the new plan year to audit the results, we wondered what we would find.  Moving from a goal-based plan to a commission plan is not something sales compensation consultants generally recommend.  But it was clearly the right thing to do for this client at this time.  Despite the problems inherent with commission, the plan had been very well received.  The reps were hungry and engaged, and the company was above target for the first time in years.

About The Author

Elliot Scott has 15+ years experience as a sales compensation and sales effectiveness consultant, with Towers Watson, The Alexander Group, and ZS Associates.  Elliot has worked for clients large and small in dozens of industries, leading both global and domestic projects and is a recognized leader in sales incentive plan assessment, design, and communication.  He can be reached at escott@newsigma.com.

How to Pay for SaaS Sales in a Legacy Software/Hardware Environment

In many respects, there’s nothing particularly complex about paying salespeople for software as a service (SaaS) — determine when and by what means to credit the sale, then run this credit through the incentive scheme, whether that be a commission (sales credit x payment rate) or quota-based payment (% of quota attainment = % of target incentive).

The real fun begins when you’re trying to motivate a sales force accustomed to earning good money for selling perpetual software licenses, hardware and services.

Take a software/hardware company with its core business in perpetual software licenses.  In 2010 the company added a SaaS solution to its offering and chartered its field sales force to sell it, while continuing to offer the core business.  It’s now September and the directors of Comp and Finance are trying to figure out how to change the comp plan so that reps sell more SaaS.  I join the conversation on a hot Thursday afternoon in a windowless, poorly-ventilated conference room at the company’s headquarters.

The discussion focuses on what should be the commission rate on the monthly recurring revenue (MRR) for a SaaS deal.  At 7% it’s currently two points higher than the base rate for a perpetual license contract.  Trouble is reps get paid on average about $10k based on half of the contract value* on a core (perpetual license) deal, and only about $500 each month on an average SaaS deal. 

*Second half of the core deal credit comes when the product is installed.

I ask, “Why would a rep focus on a deal that pays less after a year than one that pays more today?

The finance director fires back, “Because the customer wants the SaaS solution, and the rep gets an annuity stream so long as that solution remains in service.”

I bit my tongue and took the high road by elevating the discussion up a few notches, for we were in the weeds talking about rates and such, when the conversation needed to clear a few items related to the sales strategy.  That is:

1. What’s the relative priority between core business and SaaS business?

2. What is the expected net present value (NPV) of a target SaaS solution sale?

3. What is the length of a SaaS sales cycle?

4. What role should the rep have in post-sales activity – i.e., motivating the customer’s adoption and use of the SaaS solution?

Fast forward to another design meeting.  This followed a few executive committee meetings in which we got some answers to the questions above.  Armed with these answers we could now sketch out the blueprint to a new comp plan.  The real meaty issue came down to SaaS deal valuation and timing of the sales credit.

We established two design principles that helped work through these issues:

• Establish parity in the credit value between core and SaaS products: A knee-jerk reaction is to equalize the commission rate, but this doesn’t recognize parity in NPV between core and SaaS deals.  It’s complicated to reach parity when the businesses are so different – contract value for core, MRR for SaaS.  For the sales team to give SaaS the focus it required there had to be parity between the two or better yet, greater NPV incentive opportunity for SaaS.
• Establish parity in the credit timing between core and SaaS deals: The primary role of the sales rep was to focus on growing new business. That’s why the company offered 50% of the sales credit on core business at the time of booking.  Per the first principle, we established that TCV would serve as the basis for SaaS sales credit.  Providing 50% of the sales credit on TCV at contract signing struck the right balance between alignment with revenue recognition (MRR) and job role focus (close the deal and move on to the next).

Remember the timing of credit for core business was half at booking, half at installation.  SaaS installation was a few weeks versus that of the average on-premise (core) system, which was eight months.  To keep the SaaS and core credit cycles aligned we selected eight months into the first year of a SaaS contract for the second half credit trigger.  Should the annualized MRR at eight months be way off from the TCV, the plan would adjust the second-half credit amount. We had to consider any significant differences in sales cycle between the two offerings, but in this case there was none within similar customer segments.

Many companies struggle with the approach of decoupling incentive credit from the revenue recognition approach.  Thus, most SaaS companies pay on MRR.  We think that’s fine in a pure-play environment.  Here though, the company’s sales force was accustomed to earning on a deal-by-deal basis.  To expect, as the finance director did, that reps would essentially buy into an annuity – sacrifice credit today for an ongoing cash stream later – wasn’t realistic given the legacy pay approach.  Even as a stand-alone system the annuity approach becomes difficult to manage over time.  Tenured sales people build up large books of business and lose their motivation to continue growing new business; young salespeople can’t earn enough to stick around.  Territory splits and trailing of the credit, where it decreases each year to eventually reach zero, can mitigate the fat-and-happy syndrome but becomes a nightmare to manage in a large sales organization.

There are still some details to iron out in this case pertaining to goals and payment schedules.  But having aligned the incentive credit approach to elements of the sales strategy, most of the heaving lifting is behind us.

On July 28^th,  Scott and I had the opportunity to join Steve De Marco, Vice President of Sales at Xactly Corporation  for a web session on motivating 2^nd half sales.   The session focused on tips and techniques we’ve observed companies use to improve sales results through the last six months of the year.  One interesting takeaway was the higher than expected number of people who registered for the discussion given the summer timing.   We think this might be a reflection of the fact that within the current economy, sales performance is all over the place.   Companies like Apple (www.apple.com)  recently reported their best quarter ever while others, such as Goldman Sachs (www.GoldmanSachs.com), experienced a significant drop in earnings from 2009.  The session participants were asked to categorize their 2^nd half focus and responded to a range of options including “survive,” “make up ground,” “make hay,” and “current course and speed.”  Approximately 80% characterized themselves as looking to make up ground or make hay, possibly reflecting cautious optimism moving forward.    

The tips and techniques discussion focused on the use of enhanced communication, goal setting and incentives (cash and non-cash) as tools to achieve those second half-priorities.  From our perspective the most effective approaches reflect the organization’s strategy, budget limitations, culture and incentive history.   Like any incentive discussion, no solution will be perfect and it is about balancing the trade-offs.  Similarly, we observe several pitfalls to avoid:

• Minimize payments for 1^st half business
• Make the award appropriate
• Avoid cancelling programs in production
• Be mindful of unintended consequences
• No once and done communication
• Ensure realistic objectives

When asked to characterize which approach was most effective in their own experience, 31% percent of the session participants said cash.   Somewhat surprising to us was that 30% responded that they did not use any of the techniques.    

A recorded version of the event will be available on the Xactly website (www.xactlycorp.com) in the coming days.

Paying for Growth in a Regulated Environment (First in a Series)

Events playing out in the banking industry over the past 18 months serve as a reminder of how government regulation over sales and marketing can impact incentive practices.  The scenario is a familiar one to those in the retail investment and medical device industries.  There are lessons from those industries that now pertain to regional banking, or any other business, that must motivate its salespeople to sell while adhering to government regulations.

If there’s a silver lining in all this it’s that well-managed, effective sales compensation programs typically use a set of principles to guide specific practices, like which components to use in the incentive plans, and who makes what decisions regarding plan changes.

Regulations pertaining to pay usually come in the form of principles or guidelines.  In the banking industry, the Federal Reserve (Fed) and related agencies recently released its guidance for banking incentive comp practices.   Typically these memos are vague yet consequential.  If ignored, companies under jurisdiction of the agencies face enforcement action and bad publicity.

It’s no surprise then that over 85% of regional banks participating in a recent NewSigma/Varicent survey said federal legislation has had some or a significant impact on the bank’s incentive comp approach for front-line sales and service (non-executive) employees.   That leaves more than a handful of institutions trying to figure out what to do.  For those banks having taken action, many still question how best to design and manage their sales compensation plans in a way that meets the guidelines, but still promotes business growth.

Part of the dilemma when considering these and other regulatory principles is they seem to be in direct conflict with traditional principles of sound sales compensation design.  We think there is some common ground, however.

Let’s take the first principle in the Fed’s recent guidance for banks: “balanced risk taking.”

Management in all industries must strike a balance between risk and reward in the compensation plan, and use the pay mix – the amount of cash pay that base salary versus variable – as the primary lever.  The more pay that is variable, the more risk a salesperson bears in the form of income loss from poor performance.   While a higher base salary mix shifts this risk to the company, it mitigates the risk of bad behaviors that can come from lucrative upside pay.

The most common incentive plan change we observe following regulatory intervention is a reduction to the variable pay mix.  With some extreme cases aside (e.g., residential mortgage brokers), we think this is a mistake in banking.  Mix levels for most sales positions in the industry were below those for comparable jobs in other industries — before the credit crises.  Banks capped the upside pay for most if not all of these jobs, so that instances of bad behavior stemming from lucrative upside pay were remote.  The bigger problem was and still is lack of urgency by the salespeople due limited variable pay mix/risk.

Another risk comes from the misalignment of goals between the salespeople and the enterprise.  E.g., salespeople make a lot of money while the company posts a loss.  A common lever for balance is to link a portion of the salesperson’s variable pay to organizational goals, like company operating margin.  Like a reduction in variable pay mix, this shift reduces the amount of pay tied to the salesperson’s individual production.  Thus, we’re not fans of this practice, either.

Alternative practices for strengthen goal alignment include the use of qualitative, or risk-adjusted, performance measures.  The principle is to measure and pay based on the quality of the transaction or deal.  There are two general approaches for doing this.  One is based on net present value, the other on actual performance of the asset at some later point in time.  Both have tradeoffs.  Qualifying performance at the time of the initial transaction involves some guess work and can over or underpay relative to the asset’s performance over time.  We like this approach though because salespeople responsible for the transaction know up front the value of each type of deal.  We find the reconciliation approach cumbersome, particularly when “clawing back” amounts previously paid.  It makes an incentive opportunity increasingly ineffective as the time horizon, or number of variables, used to value the asset increase.

The whole point of an incentive plan is to motivate people to perform, and present real consequence when they don’t.  Reducing the variable mix, or tying variable pay to organizational measures, misses this point.

More to the point is how management defines performance.  Indeed, the amount of pay at stake can certainly drive behaviors, both good and bad.  But the sales transactions that contributed to regulatory outcomes weren’t good ones that became bad because of pay opportunity.  Paying less on these sales would not have made them better deals.

Banks and other industries faced with regulatory pay guidelines can strike a balance between paying for performance and for responsible behaviors by focusing first on the job roles and underlying performance expectations.

In our next discussion on the topic, we’ll provide an incentive-plan perspective on the the Fed’s other two principles recommended in its recent guidance.

And if you haven’t already devoured the Fed’s 47-page guidance memo, let us recommend some weekend reading:

http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20100621a1.pdf

Welcome to our blog. 

SalesCompInsights was created by Scott Barton and Mike Meisenheimer.  In our 30+ combined years of working on sales compensation design and management, we’ve collected a lot of  intellectual capital and developed a few opinions on the subject.  So it’s time to share.  This includes reliable information on sales compensation principles, as well as current trends and research. 

Over time SalesCompInsights will continue to evolve based on feedback we receive, specific requests and changes in the broader sales compensation world.  

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