Customer needs, pricing trends, implementation efficiencies and investor expectations continue to push software companies into the Cloud. An earlier article introduced the four stages that hybrid software companies encounter during their Cloud transition: Dabble, Adapt, Scale and Engage. The transition can be treacherous. Successful companies must re-evaluate and potentially re-configure every aspect of their go-to-customer model. One visible sign of a company’s commitment to the Cloud is their treatment of sales compensation. What sales compensation changes and potential trade-offs do hybrid software companies make as they transition from “Dabble” to “Engaged?”

Aligning sales compensation can be one of the most challenging and internally contentious issues as part of the transition to Cloud. The participants in Alexander Group’s 2016 Cloud Sales Index – a study that included 30+ companies transitioning to Cloud – reinforced this point. A majority of the hybrid companies responded they are struggling with alignment of their sales compensation programs and highlighted four key drivers of their struggle:

  • Fear of sacrificing existing revenue
  • Concern about churn rates
  • Inability to set quotas
  • Risk of increased turnover

Sales Comp Treatment for Dabblers:  A Dollar Is a Dollar

Ninety percent of the hybrids responded that sales compensation has a significant impact on their Cloud business. They recognize that to move beyond “Dabble,” they need to align their plans with the emerging priorities of the business. Yet 38 percent of the respondents provide no special treatment in their plans today.  Even the most loyal sales representatives are unlikely to sacrifice their personal earnings to promote the new Cloud product. Companies with solid messaging, effective collateral and misaligned sales comp plans may find themselves stuck in Dabble purgatory:  a land of big expectations and missed results.

Sales Comp Treatment for Adapters:  Solution Parity

Hybrids in the “Adapt” phase focus on active learning coupled with adjustments to their go-to-customer model. In terms of compensation, they commonly drive parity between their Cloud and traditional offerings.  Sellers still have a single quota and their Cloud sales receive a credit uplift or similar treatment. Credit uplifts typically vary between 1.5X and 3X, depending on the company’s pricing model and deal structure.

The upside to the parity model is that it supports a “customer first” approach where the company is equally supportive of both solutions. The risk is that sales representatives are drawn to their comfort zone and experience with the legacy solution. Parity approaches can have a short shelf life in companies with aggressive Cloud objectives.

Sales Comp Treatment for Scalers:  Cloud Emphasis

“Scaling” hybrid companies recognize that at some point they need to prioritize Cloud over their legacy products. Fifteen percent of this year’s Cloud Sales Index participants emphasize Cloud in their sales compensation plans. They implemented add-on bonuses, incentive uplifts or rich credit uplifts (e.g., up to 4x ACV or more) in conjunction with a total sales quota. As a more aggressive option, some Scalers established a separate Cloud measure. Typically the measure modifies the accelerator rates. Meet the Cloud objective and earn an even higher over-achievement accelerator on total sales.

These additional treatments are all upside from the seller’s perspective; there is no penalty for not selling Cloud. The downside is that salespeople do not have to sell Cloud to reach their quotas.

Sales Comp Treatment for Engagers:  Weighted Target Incentive

Companies that reach “Engage” are reaping the benefits of their investments in the form of lower expense to revenue (E/R) and the march towards long-term Cloud profitability. Cloud drives a significant portion of the revenue and receives even greater focus in the sales compensation plan. The most aggressive participants in this year’s study weighted Cloud up to 70 percent of total target incentive in their core plans. Sales representatives now have to sell Cloud if they want to earn their target incentive. Adding a linkage between the two measures (i.e., requiring reps to meet the Cloud objective to earn accelerators on total sales) reinforces its importance even further.

Ineffective quotas are one of the biggest risks to the success of plans using separate, weighted measures. The organization’s ability to deliver across the Cloud solution – from development through post-sale account management – heightens, as Cloud becomes the primary focus of the business.

Other Considerations

This year’s Index participants noted five other topics associated with the sales compensation “struggle”:

  • How to compensate for multi-year deals.
  • Whether to pay on ACV bookings, TCV bookings, MRR, ARR or other measure.
  • How to set fair and accurate Cloud quotas in the absence of reliable historical data.
  • Whether to factor contract terms when setting crediting rules.
  • Determining who should receive credit for renewals.

This year’s study participants have set aggressive goals for their Cloud transition and the pace of change is only going to accelerate. Is your organization embarking on its own transition?

Read Part 1 or Part 3 of this blog series.

Categories:

Insight type: Article

Industry: Technology, XaaS

Role: HR/Sales Compensation, Sales and Marketing Leadership

Topic: Sales Comp