Hear from Dave Eddleman, principal at Alexander Group, on how the growth phase of your organization impacts sales compensation design and the importance of ensuring that GTM elements are in place and stable before jumping to motivate sales through compensation.
[00:00:02] Hey everybody. Welcome to video number for sales compensation. I’m Dave Eddleman with the Alexander Group, and I co-lead the business services vertical along with Mike Burnett.
[00:00:12] In the past video series, we talked about trends and mandates in business services. We also talked about sizing the prize and I discussed a total addressable market and segmentation and prioritization. And then Mike talked about trends in sales coverage and the evolution of job roles. Today, we’re going to talk about sales compensation. Last but not least, I think we’ve got the order right as well.
[00:00:38] So the first thing I want to do is start with the revenue growth model and put sales compensation in context. A lot of times our clients and as we go through this exercise of sales compensation design, want to start with sales compensation or put too much waiting on its ability to enable the sales force. So our point of view is that you have to have all of these other go-to-market elements in line before we start the sales compensation design process. For example, as I talked about earlier in the other videos, total addressable market understanding to whom I’m selling and how many accounts I have and the workload model associated with that prioritization, all of that is important, as well as the value proposition and the messaging that I’m using to influence clients or prospects to buy and then flipping to the middle here. This organization and job design, understanding the job role. If I’m a field-based rep, how much hunting, how much farming, how much hybrid activities are involved. If I’m a post-seller, what type of a CSM or customer service manager, how much cross-sell/upsell renewal activities involved. So in other words, just trying to find the understand very clearly the activities and the time allocations involved. This makes the sales compensation design a lot easier. If you don’t do that, which you end up having – what ends up happening is you start iterating through the job role designs as you think about sales compensation and how to put money behind activity. So really important it says we have to get all of this or some level of stability in the go-to-market elements before we start sales comp design.
[00:02:19] So let me just move on to another sort of thought slide, but really important one. It’s not just the go-to-market elements and understanding job roles, it’s also kind of understanding where our client is or where the business unit is or the company as a whole is in terms of their maturation. As you look in that first phase there, you can see the sort of simple commission rates where we’re not really terribly sure about rep production or maybe even territory potential. So we put the sales compensation in sort of this income producer mode, and that’s really a commission rate mode. So for example, I might pay 2% on the first million dollars of production and then I might pay 4% after one million. So that would be a ramped commission rate. Very simple, very focused on the cost of sales. As companies mature and go-to-market is understood a lot better, we typically see role-based plans or quota-based plans, rep plans, and these are typically kind of a 3x upside. That means at the top, the top performers will earn three times their variable pay. This is the most common type of leverage. Doesn’t mean you can’t have two or three or two and a half x. But again, this is the prevalent type of leverage and comp plans. And about 80 or 90% of our clients have a sort of a quota-based plan, not a commission plan. As we move down the maturation curve here, you’ll start to see more sophisticated type of plans and elements of sales comp plans, for example, profitability. A lot of times we see pricing proxy or the sort of the attractiveness of deals as a proxy for profitability. Overpayment protection, spiffs, linked plans, which means I have to have a minimum performance in this measure before I can earn outstanding pay or upside pay of the other measures. So a lot of more sophisticated plans. Again, as we go down this maturation curve and really understand the go-to-market dynamics a little better.
[00:04:31] So I’m going to move to the next slide here, which looks at what are the component guidelines or elements of a sales comp plan. So if you give a sales comp plan doc to the Alexander Group, what the heck do we look at? What are the pieces that are going to be important? You can see the goals and the guiding principles, and I think those are kind of self-explanatory and that’s going to depend a lot on the strategy of the firm or the business unit, but just starting down the component guidelines here. The first one is eligibility, that is that I’m frontline, I’m facing off with a customer on influencing someone to buy something. I’m not in the back and sales ops or responding to RFPs. All important pieces to the puzzle, but not customer-facing. Probably 80% of our clients pass this litmus test where we have a pay-at-risk plan for a customer-facing job. Pay levels-this is primarily driven by HR. Do I have the right TTC? That is to say, if I’m a five-year rep and I’m in this type of industry, for example, that I would make 172,000 TTC plus or minus 10%. So that benchmarking, according to industry, very important, along with the base and variable pay mix. Pay mix – we also take a look at that again, has a lot to do with how much influence we have in the sales process. For example, a hunter might have a 50/50, 50 base 50 variable. A farmer or an account manager or a GAM or an overlay might have more likely an 80/20 mix or 75/20. But that’s typically the diagnostic that we look at in terms of determining pay mix. Leverage – this is how steep the payout curve is. How fast do I accelerate pay after I hit my goal of 100%? Measures and weightings – this is where we spend most of our time in the design process. What kind of measures are important and how do they align to the strategy? That is to say, do we want to find new logos, increase current revenues, drive margin, upsell, cross-sell, renewal, renew? What is it that fits within that job role and aligns with overall strategy? So a lot of time spent on that. It also sends the message of what’s important. Growth is important, expansion revenue is important, et cetera. Mechanics and power curve – this is just what the shape of that curve is below 100% is this threshold soft thresholds, the acceleration and then after 100% how much acceleration I have in payout curves, et cetera. Lots of detail there. Performance and payoff periods – how often I get paid? And that’s also super important. Quotas – we’ll talk about that in a second. Crediting and policies – a lot of our B2B clients have two or three or four folks involved in the sales process. So we have to allocate credit to specialists, overlays, managers, whatever in terms of retiring quota and driving payouts in the sales comp plan. So this can get very complicated. Five, 10, 15 people I’ve seen, that’s kind of crazy, but who’s involved in getting credit to get paid? The last piece here is Spiff. About 60% of our clients somewhere around that range, the majority have some variable discretion during the year to add monies in to sell new products, new services, something that they may see that’s underperforming and then they are able to add money to it. So stepping back, these are the things, these are the issues that we look at just as a practitioner point of view, regardless of the maturation of the company as we were talking about before.
[00:08:24] The next thing I want to talk about is sales quotas, because this is sort of the flip side of sales compensation. So this is kind of what we like to see a good balance of quota distribution. About 55-65% of sellers should meet or exceed quota. That’s again, sort of the Nevada Gaussian distribution. The top 10%, those are those three X folks. That’s two standard deviations off the norm. And then the top 25% is one standard deviation off. And if we don’t see this, it’s very difficult or can be difficult to align the payout curve so you can see this yellow curve going through there. That’s what’s driving the money. But even separate from that, it has, in some ways, nothing to do with sales comp. How well do I understand territory potential and how well can I set these quotas? So I have a balance within the group of incumbents. And that’s really is driving a very healthy sales environment when I can have the balance of the folks that overachieve and underachieve. From there, when I really see what this curve looks like in reality, and we typically try to get three years of data on this to get some nice good sample and saying this is how really good or not good you are setting quotas, then we can align the payout curves accordingly.
[00:09:50] But this is not the first thing you look at. This should be the last part of the go-to-market framework is sales comp. We talked about that. Collaboration – this is another point. It’s important that you get some folks involved, some of what we call all-star varsity players that can actually be involved in this design process. That’s not to say that we let the fox guard the henhouse here. However, it’s important that we get participation of some people in the sales force, so they have their fingerprints on the design, and they can help drive the adoption of the sales comp plans in the future. Unless you get good change management, which is the next bullet point, the sales comp plans are just not going to work. So we have to have good buy-in, understanding of how we’re going to climb that hill next year, understanding that yes these quotas are fair and balanced they have some good quota allocation method methodology as well. And typically that is always something that we look for and may want to adjust as how we set quotas. Not always the case, but it’s fairly prevalent out there.