The most important decision when developing a sales compensation plan is selecting the right performance measures. The performance measures, and measure weights in the case where you have multiple measures, provide clear direction to the sales rep on what to focus on and how much time to focus on it.
First, Do You Have a Clear Strategy and Roles?
Before determining what measure(s) to use, you must confirm the company strategy and desired sales behaviors for each selling role. If the strategy is ill-defined and/or the job role is unclear, corrupted or unfocused, then two problems can occur. First, the sales comp plan can drive the wrong behavior. For example, one cloud company decided to remove renewals from their Account Executive plans since a separate role was going to focus on renewal sales. However, two years into this approach, the renewal rate had dropped by 10%. Removing the AE’s focus on renewals had a direct impact on renewal rates. The second problem that often occurs when the strategy or roles are ill-defined is unnecessary cycle times by the Sales Compensation design team trying to figure out how to compensate the sales force. In one case a hybrid on-prem/cloud software company spent four months going back and forth on measures and weights for their sales reps who sold both on-premise and cloud solutions because leadership could not decide what to prioritize.
What Measure(s) to Use?
There are many different cloud (or recurring revenue business model) measures that companies use. The list below provides a short list of those measures. The business type focus (new, renewal, total) depends on the role definition. How much time is the role hunting in the wild, hunting in the zoo, or farming? The use of booking metrics (ACV, TCV, MRR), revenue metrics (TBR, Revenue) or number of deals depends on the company’s business model and contract commitment level. The Alexander Group’s 2014 Cloud Sales Index Study of 22 pure play cloud and hybrid companies indicates 100% of the companies use Bookings, followed by Revenue (41%), Multi-year (35%), and Net Recurring Revenue (29%). Other measures include Number of New Accounts, Cash up-Front, and Retention.
Cloud/Recurring Revenue Measure Types
What Crediting Rules to Use?
Generally speaking, companies should measure and credit a sales rep as close as possible to the persuasion event (generally when the customer signs a contract). However, there are a few situations that call for crediting the sales rep on downstream events like invoice, delivery, customer acceptance or cash collection. For technology and cloud companies, the measure selection and crediting decision depends on the company’s business model and contract commitment level. The framework below outlines the crediting considerations for each business model and commitment level. For example, perpetual license sales with an absolute commitment are credited at the time of bookings or invoice (invoice is generally done at the time of bookings, so it is a proxy for bookings). Subscription models generally credit a committed value at time of bookings, and utility models generally pay on actual usage. Because the crediting event for utility models occurs after the bookings event (and in many cases, WAY after the bookings event), compensation plans for utility models often include some type of Number of Deals measure.
Just over half of the companies in our 2014 Cloud Sales Index Study credit at Bookings (56%), followed by Invoice (24%), Deployment (8%), Delivery/Usage (4%), Various Stages (4%), and Other (4%). For contracts with varying term lengths, Annual Contract Value (ACV) is the most predominant practice (54%), followed by Total Contract Value (TCV) (38%), Net Present Value (NPV) (4%), and Decelerated Value (4%). Other practices we have seen include Total Value Staggered and First Year Value Only. The most common reason for using ACV over TCV is to accommodate unpredictable contract term lengths that cause quota setting issues (i.e., when term lengths vary, ACV makes it easier to predict performance expectations and set quotas). For plans based on ACV, it’s not uncommon to also have a measure to recognize and reward for multi-year deals. This could come in the form of a credit uplift, an add-on incentive or a separate multi-year measure.
Technology Sales Crediting Framework
How Many Measures?
Best practice is to keep the plan simple with three or fewer measures. Too many measures dilute sales rep focus and complicate incentive calculations. With more than three measures, reps tend to “fog out” and just do what seems best rather than pay attention to the sales compensation plan. In our recent study, 95% of participants use three or fewer measures, with 82% using only one or two measures.
What Weights to Use?
When leadership wants to drive multiple strategic objectives and, in particular, when specific roles have multiple goals, it becomes necessary to have two or three measures in the compensation plan. The next key decision is how to break down a sales rep’s target incentive across those measures in the form of a measure weight (e.g., 70% new business and 30% renewal business). Best practice is to think of how much time you want your sales rep spending on each measure and the strategic importance of each measure. Many companies erroneously use the quota size of each measure to dictate measure weighting. Quota size should not drive this decision. For example, a hybrid software/cloud company wanted to place more emphasis on new business over existing business. When they looked at the quota sizes, each rep’s book of business varied dramatically between high new (80% new) to mixed bag (50% new and 50% renewal) to high renewal (70%+ renewal). So, they created three plan designs to accommodate three books of business profiles. But, when they surveyed the sales force regarding their time allocation, 80% of their time was focused on new business regardless of how much renewal business they had, mainly due to the use of renewal reps to help focus on the renewal business. So the company changed to one plan with 80% weighting on new and 20% on renewal which simplified the plan design and aligned to the job’s desired behaviors.
How are you measuring your cloud sales force? Is it driving the right behaviors? Are you achieving your strategic goals?
To learn more about this topic, please download our eBooks Cloud Metrics: What You Should be Measuring in Your Cloud Sales Compensation Plan or Rules of the Road: Complex Sales Crediting and Solving Crediting Challenges. Or, contact Alexander Group for a complimentary briefing.