As part of the Developer Platform Evangelism community, I talk to ISV partners about how the cloud is transforming their business. Many ISV’s making this transition to cloud have asked for guidance on cloud sales compensation. Sales compensation design can be a complex & confusing topic and, implemented incorrectly, can cost the organization a lot of money or cause top performers to leave. Landing on a compensation structure that aligns to corporate strategy, drives intended behavior, and is motivating to sellers is essential to financial success. This is especially important when sellers are asked to carry new cloud services that deviate from their traditional On-Premises products.
There is a lot of good advice online as many industry experts have simplified Cloud Sales Compensation concepts. I find myself going back to key concepts highlighted by industry experts such as Joel York, author of the blog, Chaotic Flow and Philippe Botteri of Accel Partners. I’d recommend that you keep these five key concepts in mind as you design sales compensation to drive your cloud success.
- Recurring revenue, not bookings, is the new performance measure: As you move to sell cloud services, fortunately, the primary principle of sales compensation remains the same – pay the rep in proportion to the value of the deal. You just need a new way to measure the value of the deal. For subscription services, instead of unit price (or bookings) of upfront license fees, recurring revenue – either monthly (MRR), quarterly (QRR) or annually (ARR), should be the primary performance measure for your sales teams. It does not really matter which one you choose as each is an approximation of lifetime value (LTV). But often companies align the time-frame to their most common contract renewal term; i.e. if you sign annual contracts, then use ARR.
- Incent the behavior you want: Sales reps optimize their commissions, not company value. Do not expect your sales team to change behavior if you don’t change their compensation plan. Your CEO may have a “cloud first” strategy, but your sales force will still drive legacy solutions if that’s the quickest path to quota. Bottom line, you do have to make some changes.
- Re-evaluate your sales organization structure and roles: When expanding outside of traditional On-Prem offerings, companies must look into how best to structure their sales force and which sales roles are important to their sales activities. Companies can either keep a single sales force focused on all offerings or have two sales forces – one focused on cloud services and other focused on traditional On-Prem products. Smaller companies tend to have single sales force model with generalist sales role and larger companies have two sales forces which multiple sales roles to meet customer expectations.
- Assign two different goals for performance measure: The simplest solution when selling both On-Premises and Cloud offerings is to assign reps two different performance measures: revenue or bookings for On-Premises and recurring revenue, Annual Contract Value (ACV) or Total Contact Value (TCV) for Cloud. This will reduce rep confusion.
- Keep the metrics simple and data transparent: Simplicity is important. If a compensation plan is too complex to understand, then it’s too complex to drive behavior. Do not compensate on data that sales cannot access directly or is not 100% transparent. Establish a clear process for sales reps’ questions and disputes.
Adjusting your cloud sales compensation requires some planning and thought, but by keeping your business goals and sales reps’ motivation in mind you can build a sales compensation model for your cloud success.
To learn more:
- Attend WPC (World Wide Partner Conference) 2013, in-person session: Driving SaaS success; using the right price and the right incentives
- Read Compensating Sales Reps to Align to Your Cloud Strategy
- Ask for consulting services with the Sales Compensation Experts: The Alexander Group
Guest Author, Neeti Gupta
Senior Business Strategist
Developer and Platform Evangelism