Tech Firms Revisit Straight Commission Plans for XaaS RolesBy: Sean Ryan Sales Compensation, Technology Sales
Sales compensation plans in the technology space run the gamut from straight commission plans to quota-based bonus structures. The emergence of XaaS (anything as a service) has profoundly disrupted the efficacy of the recent quota-based bonus sales compensation structure within many mature technology companies. Sales leaders seek to remedy today’s lack of bookings predictability and the need to drive customer acquisition around XaaS. To do this, tech firms are scrutinizing the at risk portion of the straight commission plans of yesterday — particularly for XaaS hunter roles.
Sales compensation plans once paid sellers with simple, straight commission plans. These plans typically allotted sellers a percentage of the revenue and/or gross margin dollars they brought into the business, paid from dollar-one of attainment. As the technology market matured, sales compensation structures became more complex. Territories grew increasingly unequal over time. The emergence of recurring revenue streams, books of business and retained accounts made revenue both more predictable and often less dependent on sales effort and skill to attain. The result of these shifts was the emergence of the quota-based bonus structure as a foundational mechanism in sales compensation programs for the majority of technology companies.
Quota-based bonus (QBB) plans equalized incentive pay for similar levels of performance based on attainment of available opportunity within a given territory. The QBB structure required target setting, typically at the role level first and gradually moving to the individual level. As existing revenue streams increased across territories, so too did the use of thresholds, hurdles, multiple measures and other sales compensation mechanics. That made sales compensation plans more complex, mirroring the businesses they supported.
After some initial turbulence, tech companies settled into a predictable pattern of attainment within the QBB structure. Most companies utilizing QBB models achieved a steady state of about 50 percent of incumbents achieving or exceeding targets in a given year. Most mature tech companies also reached a relative comfort level in setting realistic goals at the individual level. And then came XaaS.
The emergence of XaaS placed the QBB sales compensation structure within many mature technology companies in a tailspin. Selling a XaaS offering, even to an existing customer, usually requires a new pursuit (acquisition) sales motion. The results of acquisition sales motions are far less predictable than the retention and penetration (upsell/cross-sell) sales motions tech companies have relied upon for decades to attain growth. In addition, the deal sizes for a XaaS offering are typically much smaller than for an on-premise deal, which further complicates the target-setting process upon which the QBB compensation model depends. It is difficult to quantify the impact of the emergence of XaaS on overall performance levels in technology. Anecdotal information from Alexander Group (AGI) client work suggests that overall sales attainment of goal for those selling XaaS in addition to On-Prem slipped from about 50 percent (as noted above), to about 35 percent. When goal attainment starts to drop dramatically, sales turnover becomes a significant risk as sellers start to question the veracity and realism of sales goals. Some client organizations have addressed the issue of suboptimal attainment by lowering goals, which can be detrimental to overall company performance. Increasingly, tech companies are reverting to straight commission plans for XaaS sellers, and particularly for those in primarily hunter sales jobs.
As outlined above, there are two primary drivers for the move to straight commission plans for XaaS hunters. First is lack of predictability of XaaS bookings and resulting revenue. Second is the need to drive customer acquisition around XaaS. In a very real way, the emergence of XaaS has created a similar selling environment to that which pervaded at the outset of the PC and Client/Server revolutions. There is a race for acquisition. Capable sellers are at a premium. The market is volatile and unpredictable. As a result, more technology companies are beginning to move toward sales compensation structures that create a more direct link between seller activity and payout of variable sales compensation plans (e.g., a straight commission structure).
Here are a few best practices to consider when contemplating a move toward straight commission plans for some segment of the sales force:
- Don’t completely abandon the notion of targets when you make a move to commissions. Use an inherent target as a guide when setting rates, even if this rate is not made explicit to sellers.
- Use multiple, escalating rates. Avoid the temptation to use a single rate across all levels of performance. The use of multiple rates will encourage sellers to work harder to attain a higher rate pay out rather than settling for an acceptable level of personal income.
- Level the sales force if significant disparities in opportunities exist. If there are natural points of inflection in opportunity by territory, consider using different rates for variable compensation and different salary levels. As a simple example, in High Opportunity territories (Level 2 Reps), pay reps a higher salary and a lower variable commission rate. In Low Opportunity territories (Level 1 Reps), pay reps a lower salary with a higher variable rate. This will normalize pay across territories while preserving a distinction between large and small market sellers.
- Consider alternative measures. Companies are using a variety of measures to drive hunting behavior including payouts on: net new logos, verified pipeline, customer trials, etc. These measures should always be objective and auditable.
Successful tech companies avoid the temptation to become dogmatic about sales compensation. The best advice we can offer from AGI is to let the dynamics, demands and maturity of the marketplace you’re attempting to serve shape the sales compensation philosophy job-by-job. An increasing number of tech companies are taking another look at straight commission plans for their XaaS hunters to meet the challenges of an extremely unpredictable marketplace, and to provide fair, motivational sales compensation programs for their sellers. If you’re on this journey too, we would love to provide you with some additional perspective about how to address these important challenges.
Contact the Alexander Group’s Technology team today.