Sales Compensation Plan Designs – Cost of Sales vs. Cost of Labor Models

By Clinton Gott, Principal

One of the most common and significant topics during sales compensation design engagements focuses on the right mechanic to use – whether to use a Cost of Sales or Cost of Labor model. In simplest form, Cost of Sales models use absolute commission designs while Cost of Labor models tend to use quota-based plan mechanics. A Cost of Sales model offers a set commission percentage against the volume results generated. Meanwhile, a Cost of Labor model attempts to deliver market appropriate pay levels aligned to a job’s worth in the market for delivering an expected level of production. There is of course a lot more to this story, and deciding on the right approach is an essential design question.

Cost of Sales Model

As mentioned, the Cost of Sales Model implies using an absolute commission mechanic. For example, a salesperson may receive 10% of each dollar of revenue generated. Typically, such designs may start with some expectation of performance so the commission rate can be set to deliver some approximate income level. For example, if a company believes a typical salesperson should generate $1,000,000 in revenue and wants to pay them approximately $100,000 in variable pay, then the rate would be the 10% mentioned above. In some cases, the absolute commission rate is simply selected based on some dollar amount a company is willing to share with a salesperson, in effect to offer someone a “cut” of the deals one drives. These designs are simple, not particularly elegant, and can fairly be described as “old school”. They are generally used for specific cases including:

  • When a company first opens its doors – classic startup plan and that sometimes continues through the high growth phase.
  • If a company is not confident or able to identify expected productivity expectations, also known as quotas or goals.
  • When most salespeople have similar territory opportunities and thus earning opportunities.
  • More transactional environments often with shorter sales cycle times.
  • Salesperson rather than company “owns” the customer.

In most cases, companies using a Cost of Sales variable incentive model will still offer some kind of base pay – very few sales environments are truly 100% commission. Quite often though, this Cost of Sales model will eventually start to show its age and begin to break:

  • Startup companies often move from SMB customers to Enterprise sales – that often means much larger deal sizes resulting in much larger incentive payouts. Earnings can begin to dwarf the market cost of the sales talent needed. A common story occurs the first time a sales rep makes more than a C-level executive, design questions will start to crop up. This issue can bubble up even more quickly if C-level resources are also helping to create and close the new massive Enterprise deals – “why should the sales rep get all that commission for the deal I drove?” becomes a familiar refrain.
  • Salespeople will sometimes build up a book of business that is large enough to sustain a comfortable wage year over year. Growth can often start to stall in these instances if the extra incentive doesn’t feel significant enough to reward for the extra sales efforts.
  • Adding products or services often leads to more complex sales environments requiring added sales resources including sales specialists, technical specialists, and inside sales. The initial absolute commission rate is no longer cost appropriate, but reducing a legacy commission rate usually goes over like a lead balloon. You’ll soon hear, “What happened to my 10%?!”
  • Without clear quotas and incentives directly tied to quotas, leadership may feel disconnected from a clear vision on how the overall corporate goal will be achieved.

Those and other issues almost always arise, leaving companies looking for a solution to drive growth in a more reasoned, exciting, and cost effective manner. Enter the Cost of Labor model.

Cost of Labor Model

The Cost of Labor model attempts to offer a market appropriate total pay level to salespeople who achieve fair and reasonable productivity expectations, again often called quotas or goals. The market level is usually identified as Target Total Compensation (TTC) and is a combination of Base Pay and Target Incentive, the balance of which is represented in the Pay Mix, e.g., 50/50 means half in base and half in expected variable pay. When a salesperson hits his or her quota, that person earns one’s individual Target Incentive amount. There are a plethora of design nuances to consider, such as when incentives should start being paid (threshold) and what happens for above quota results (usually some acceleration). We can leave those details for another day, but companies usually find Cost of Labor quota-based models are useful in many cases:

  • More moderate to low growth stages where every dollar of growth can be more challenging and feel more important – acceleration above goal creates the growth energy needed.
  • Need to protect and penetrate a base of current accounts in addition to acquiring new ones.
  • Unequal volume potential in assigned territories or books of accounts – can lead to unequitable earnings opportunity from winning the “territory lottery”.
  • Complexity requiring multiple sales participants versus “lone cowboy” market makers.
  • Companies have a better understanding of the levels of productivity that can be expected from the salespeople – the data and process for setting goals exists.
  • A desire to have clear accountability for who is responsible for delivering a part of the total organizational goal.

It is extremely important to clarify that Cost of Labor models are no less exciting or energy-filled than Cost of Sales models. If anything, a well-designed quota-based plan can create more energy, both including enough downside risk (the “stick”) and upside urgency (the “carrot”). Offering the right level of upside by way of the acceleration rate is absolutely essential, and that topic alone deserves its own study and consideration.

In some sales environments and with some stakeholders, you may find nostalgic feelings for the “good old days” of absolute commission plans. Or some may hold on to an ideology that absolute commission plans are simply “the right way to pay” and will best drive growth. Case after case though shows that in most instances, goal-based plans actually drive better results and create more fair payouts than traditional absolute commission models. We published one such example in Workspan where we piloted quota-based plan designs vs. legacy commission designs in a relatively flat growth environment; those on the quota-based plan drove revenue 3% higher than those on absolute commission. The new goal-based plan design was considered a stunning success.

Earlier I used the phrase “fair and reasonable productivity expectations”, which is almost always the most challenging part of quota-based plan designs. Establishing a clear methodology, ideally that improves over time, is at the foundation of doing high quality quota setting. Few companies feel particularly good at quota setting yet just about all of them do it, certainly at the topline level and quite often down to territories or accounts. There are a number of best practices that we can share at another opportunity.

In terms of plan designs, I often say to my clients that, “There are no fundamentally bad plan designs, but there is a time and place to use each type of design”.  Admittedly, that may be a bit generous to some of the plan designs we’ve seen out there, but most are developed from some point of reason by someone trying to do the right thing or to solve a business issue. When it comes to using Cost of Sales or Cost of Labor models, here too there is a time and place for each option. In most cases though, companies will benefit by eventually evolving to well-reasoned and carefully crafted quota-based plans.

For more information, please contact us at info@bettersalescomp.com.

Retail Industry Sales Compensation Designs and Use of Store Rankings

By Clinton Gott

Recently, we’ve observed retail organizations becoming more concerned about ensuring their sales incentives are rewarding appropriately and driving store-level results. Many organizations have also been wondering if and how store rankings should play a role.

Use of Store Grades/Rankings/Tiers

Most retail chains rank stores, often using A, B, C designations or tiers. Fewer though tie those rankings directly to incentives or at least to any significant degree. Usually such programs are designed to:

  • Create some level of contest-type energy – the classic use of leaderboards.
  • Support rewards and recognition programs – employees in top performing stores can receive some level of acknowledgement, whether just recognition or small non-cash rewards.
  • Identify which store practices to learn from and emulate (Tier A stores) and which ones may need more coaching and development support (Tier C stores).
  • Factor into merit determinations or other performance management evaluations, particularly at the store manager level.

The most common stack ranking metrics are of course tied to volume, which can have a bias toward larger market stores. Many actually prefer factoring in growth percentages or ideally performance against goal. This levels the playing field and gives all stores a chance to shine, not just finding success by being in a metro area or fortunate market.

In general and in most cases, if the grades are stack ranked, e.g., equal thirds A, B, and C, that approach can actually be seen in a very negative light. It’s a zero sum game. In good periods, objectively strong performing stores can be forced into a B or C grade if others happen to have performed even better. In general, forced ranking programs aren’t great in most settings, and if they tie back to compensation, they risk creating even more angst.

Retail Compensation Programs

First off, base pay whether expressed as salary for management or hourly pay for most employees is the most prominent pay component for sales organizations in just about all industries but particularly in lower paid ones like retail. That having been said, variable incentive programs can still have great significance in retail environments. In terms of plan designs:

  • The most common metrics are store revenue, sometimes margin, softer items like customer satisfaction (“fill out the survey on the web address found on your receipt”), and/or operational topics (safety, inventory management/turns/shrink, returns, etc.)
  • In terms of mechanics, the best way to pay is using goal-based plans, particularly when tied to primary volume metrics. All stores should receive goals and are calibrated against those expectations of performance. The results aren’t stack ranked but target incentives are paid out mathematically using an appropriate payout formula (using a minimum performance threshold where payouts start, 100% incentive at 100% goal, and then enticing acceleration for beating goal). This is a bread-and-butter sales compensation design, and it has strong applicability in retail.
  • In many cases, the variable incentive in retail is expressed as base plus bonus, e.g., $4,000 base with 25% bonus opportunity (so $1,000 bonus target) in a given month. The measures and mechanics then compute against that amount.

One interesting question to consider is who should be eligible for variable incentives. Clearly, store management and senior roles should be eligible for variable incentives. Again, typically that’s base plus bonus primarily tied to a volume metric and performance calibrated against goals. Other metrics or design elements can be included as well if such things are strategically relevant, but that’s not always necessary in the cash-based variable incentive program.

In terms of best practices, companies should try to extend some level of variable incentives as deep down into the retail store as is sensible. It helps to have the lower paid folks actually caring about how the store performs, even if the payouts (cash or non-cash) are relatively small. These are often team-based/total store metrics, and small rewards can really matter to someone at a lower income level. One area to consider is the gradually increasing minimum wage levels that lock in more pay in base but leave less opportunity for creative variable incentive programs. This is still a developing topic and can vary based on state-by-state minimum wage developments.

Also, some retail stores of course pay individual commissions, but usage varies and has mixed results. Few retail worlds truly have one-on-one sales rainmakers tied to individual customers. And without some connection to team results, customer service can really suffer. What happens when the dedicated salesperson isn’t working on the day a customer comes into buy? Most likely, that customer has a bad service experience, and it’s tougher than ever to recover in retail when the customer isn’t happy. In most store environments, offering rewards for how the total team and store performs is usually the right option when using variable incentives, while individual efforts can be performance managed or recognized in other ways.

Daily news stories consistently report on the challenges in today’s retail environment. A focus on high service and customer satisfaction levels can be a critical differentiator, and the right incentive plan designs will energize and reward the salespeople who make it happen.

Four Sales Compensation Lessons from Wells Fargo

By Clinton Gott, Better Sales Comp Consultants

Millions of fake customer accounts. 5,300 rank-and-file employees terminated. $190M in federal regulatory fines. Fraudulent behavior apparently dating back years. The recent headlines about Wells Fargo have been scathing. Even without the full details, it seems obvious quite a few infractions were committed by the sales organization and leadership team at Wells Fargo. In the pursuit to find blame, fingers seem squarely and subjectively pointed at the sales compensation program, whether fair or not. What is objectively clear is that companies are concerned, as questions about sales compensation plan risks and requests for risk assessments have taken a pronounced spike. Our clients have been asking Better Sales Comp Consultants for our perspectives, and we have identified four important lessons relating to the fiasco at Wells Fargo.

1. Plan Designs – seek balance and follow best practices

Plan designs themselves are not usually the primary cause of plan risks, whether in terms of unexpected compensation costs or the likelihood of unethical behavior. However, one symptom of poor plan designs is often a desperate and frustrated sales environment.  One particularly relevant topic in this situation concerns inadequate base pay with overly aggressive pay mixes.

In talking to contacts familiar with the Wells Fargo sales comp plans, there was very little base pay and very aggressive pay mixes. If all or most of pay is being delivered in variable pay, the sales energy and urgency can move from healthy and energetic to desperate and dangerous. A very aggressive pay mix particularly with low overall pay levels means results don’t just cause tension or belt-tightening but can compromise one’s ability to put food on the table and a roof over one’s head. Salespeople should be motivated and hungry rather than starved and reckless if sales results don’t break well in any given day, week, or even month. A reasonable pay mix in alignment with best practices can help create the right balance.

Plan measures are also a relevant topic area, as the “Great Eight” cross-selling metric has been repeatedly cited as a driver of this situation at Wells Fargo. First, the goal of eight, allegedly selected because it rhymed with great, seems whimsical at best; we hope that’s more an urban legend than a true goal-setting methodology. But the cross-selling objective isn’t necessarily a wrong or illicit one. Companies often want to drive strategic sales and increase the penetration from certain products. The real issue here is the opportunity to cheat that seemed to exist in this high transaction B2C sales environment and that such behavior was seemingly condoned, which we’ll explore later. But don’t necessarily blame the cross-selling measure itself for the events at Wells Fargo, as product penetration and growth strategies can be strategically effective and do not inherently inflate risk.

BSC Advice – offer a reasonable fixed portion of pay and include sales personnel in a performance management program. Create the right foundational environment while offering exciting and optimistic variable incentives that will foster a healthy sales culture with positive sales energy.

2. Goal Setting – get real about unrealistic stretch goals

Few supporting programs can create more desperation than overly aggressive goal setting. If goals appear unattainable, even with hard work and high performance, then one shouldn’t be surprised if cheating becomes a “go to” move. Some misguided sales leaders say that the best way to increase performance is to increase quotas, while most folks know there is more to this story. A better expression perhaps is the best way to increase cheating, demoralize salespeople, and eventually create turnover is to stretch quotas excessively. We’ve observed overly-hedged quotas becoming more prevalent and more pronounced during the tepid recovery after the 2008 collapse. A recent BSC/WorldatWork quota study suggests about half of companies over-allocate quotas and the most ideal range is only 5-10% down to the frontline salespeople; that amount seems like a fair hedge and allows for some flexibility in making deployment and account decisions. Anything more will likely lead to fewer than 50% of reps achieving goal, a sales culture of losing, and a much higher likelihood of risky behavior.

In the case of Wells Fargo, it appeared that not only were goals stretched but over-zealous sales managers would over-emphasize goals and results as often as every two hours. One can easily imagine a dark and anxiety-laden environment, more like a boiler room than a sales office meant to optimize customer interactions and drive related sales outcomes. It’s an outdated model, prone to risky behavior. Further, this approach likely falls extremely flat with coveted Millennials or really anyone who understands the two-sided coin of sales and service.

BSC Advice – use quota over-allocation thoughtfully. Attempt to limit total hedge to no more than 5-10%. Stay focused on a positive performance culture and avoid the boiler room drama.

3. Corporate Governance and Oversight – mitigate risk and protect your business

With all the negative attention on the financial services sector from 2008 and other times, it’s both easy and hard to imagine this kind of fraudulent activity would pop up once again at a bank. Skeptics may say it’s in the industry’s DNA, and one would think lessons should be learned from prior misconduct. Some may feel that pushing past the envelope will again pass with few repercussions. The depth and breadth of the Wells Fargo fraud is clearly not just a frontline sales rep issue. Management likely had to encourage it or at least have been willing to look the other way.

Companies should ensure the right governance rules and oversight processes exist. Define who is responsible for what, and hold them accountable. I’ve had clients with audit groups who sampled and reviewed plan payouts and deal details to ensure appropriate conduct and ethical behavior, not just to do the right thing but to minimize corporate and shareholder risk. At Wells Fargo, it’s hard to believe the fallout from years of fraudulent accounts and burned customers didn’t escalate to someone somewhere, but there should have been a person or group looking for abuse and mitigating risk. As a consultant, I’ve joined my project sponsors for interactions with internal audit groups. While they haven’t always seemed necessary, I’ll look at them in a much different light now. Wells Fargo’s fraudulent behavior should alter perspectives and will likely cast a longer shadow than some currently anticipate.

BSC Advice – take corporate governance seriously, as not just “the right thing to do” but for the health of your business. Invest in appropriate audit resources to support that mission.

4. Zero Tolerance Policy – foster ethical behavior as a mission critical activity

Companies should have a zero tolerance possible for unethical behavior. This should apply to all levels. Ethics should be part of the dialogue around all business behavior… yes, even in the rough and tumble world of sales. It should be pillar of a company’s mission statement.

There were rumors about Wells Fargo whistle blowers receiving the kind of treatment one should least encourage – ignored, shunned, and at worst, terminated. Leadership needs to create the right culture, and it should trickle down to every level. The ideal outcome is a culture of both high ethics and high performance from an elite organization.

BSC Advice – focus on ethical behavior in your mission statement, in leadership communications, and as part of your performance management culture.

In conclusion, sales compensation plans and programs can be a great way to align salespeople and company results, excite sellers, and drive optimal performance. It’s easy to point blame at the plan design or even goal setting at Wells Fargo, and those elements should be carefully considered. But one should raise the focus up a notch. Focus on the leaders, the messages being sent, and the corporate culture that enabled this situation. Hopefully, with the right controls, a culture of ethical performance, and both appropriate plan designs and goal-setting methodologies, other companies can learn from the many lessons of the Wells Fargo crisis.

Q4 Crunch Time – How to Create Winning Sales Compensation Plans

By Clinton Gott, Co-Founding Principal

Fourth quarter and the clock’s ticking. The pressure’s on to create and roll out better sales comp plans in early January. It may not be an easy, but the right game plan will ensure a winning outcome. Focus on the following activities and questions, and you’ll earn MVP honors in the effort to drive better sales performance!

Define and Confirm Your Sales Strategy for the New Year

Is your organization introducing new products? Are you targeting particular sectors or account tiers for growth? Do you have a targeted emphasis on penetration, acquisition, or retention? You are likely targeting a range of sales strategies and preparing for an effective plan design effort means understanding what the organization is trying to achieve.

Define and Confirm Your Sales Roles and Responsibilities

To have effective sales compensation plans, you have to have effective sales job definition. If targeting a new product, can your core sales team sell it or will you need product or technical specialists to support the effort? If looking for growth in new accounts, do you have a defined hunter role or will your salespeople need to both hunt and farm? Overall, do you know how each role is supporting your sales strategy, and then how your current incumbents and potential hires slot to those roles? Organizations often want to jump to the details of their sales compensation designs without fully understanding what the sales roles will be asked to do.

Assess the Performance of Your Current Plans

Effective sales compensation plan assessments should include both qualitative input and quantitative analyses. You should seek input from the various leaders in sales, finance, sales operations, and human resources. Systems/IT may have input to share if plan administration, data, and reporting have been hot topics. We also recommend gathering input from the field, either through your sales managers, formal project-based interviews, and/or an online engagement study. Every sales organization has a unique character and various stakeholder personalities involved; understanding how well the plans focus and motivate the salespeople is a critical area for exploration.

As the year winds down, you should also analyze the plan’s performance and test the return on your sales compensation spend. How have people achieved against targets? What does the pay-and-performance relationship look like? Does the plan offer the necessary downside risk and upside opportunity? These analyses and others should combine with the qualitative input to form the story of your sales incentive program’s performance, identify change objectives, and point to areas for potential improvement.

Generate New Plan Ideas and Engage With a Design Team

We recommend pulling together critical and well-informed stakeholders from sales, finance, human resources, and sales operations to define plan needs, consider potential solutions, and eventually make plan recommendations for the new year. This can take the form of a two or three in-depth meetings. For each perceived need, the team should identify solutions from the world of sales compensation best practices and weigh the pros and cons. Ideally, those best practices should come not just from things you’ve done before or how your direct competitors allegedly do things, but you can and should look more broadly to leverage best practices across the many sales organizations and industries that exist.

Consider the options within the context of your unique corporate culture and organizational needs. You should look at the plans specifically for each unique sales role and address appropriate questions. Do you have the right pay levels for the talent needed and does the pay mix create the right risk/reward relationship? Do the plan measures support your sales strategy and can they be effectively measured? Are the plan mechanics simple and motivational? Is there enough upside and acceleration? Are there particular crediting challenges or details to define? How will sales goals be set and communicated? Overall, are your new plans aligned to your compensation philosophies, will the reps understand them, and will they drive each salesperson to achieve optimal performance?

Perform Cost Modeling to Test the Plans

Before taking recommendations all the way to final plans, you should perform scenario-based cost modeling. How will the plans perform and payout in a bad year, an average year, and a good year? How do the costs of the new plan compare to the prior plan at the macro-level and at the individual level? Which particular reps will win or lose, and is this displacement acceptable or does it put you at risk? What does the compensation cost of sales (CCOS) look like under different scenarios and do the economics of the new plan designs make sense? If not, you may need some fine-tuning before moving on to truly final plan designs.

Prepare Communication Materials and Define Your Communication Approach

This is a very important final step but one that often gets overlooked or shortchanged. Be sure to leave enough time for it! Create rollout presentations that communicate the what, why, and how of the new plan designs. What are the new plans? Why are we making changes? Be sure to connect the changes back to sales strategies. How did we make the changes? Be sure to share the process and the involvement of (hopefully) well-respected design team members. Make sure the salespeople know they matter and be sure to focus on how they’ll maximize earnings under the new plans.

Sell them on the plans – do not just communicate them. Be sure to have clear plan documents and even plan calculators to aid in understanding. For the rollout approach, wait until the upcoming year starts so you do not distract them at the end of the current year. Once the year begins, we recommend a business leader or sales leader perform the initial rollout presentation either at an in-person sales conference or via a webinar. Then task the sales managers to hold one-on-one sessions with their salespeople to sell the plan, answer questions, and generally do their job as coaches and motivators. Be sure to provide a path back to human resources or sales operations if a salesperson has additional questions and to help support the sales manager efforts.

Get to It!

Believe it or not, most organizations can perform the above steps over a focused 8 to 10 week process. It takes prioritization and the ability to involve the right people. In some cases, outside expertise can help drive the process or provide the sales compensation insights to help an organization navigate the various decision points along the way. The sales compensation program is an important enabler of your organization’s sales performance. Even though the year-end is fast approaching, there is still time to ensure your sales compensation program is well-positioned to drive your sales success in the upcoming year. Use the right game plan and you’ll knock down the winning shot every time!

Moving from Traditional Licenses to Subscriptions – Better Sales Compensation Practices

By Clinton Gott, Principal at Better Sales Comp Consultants

One of the most common questions we receive from software organizations today is how the sales compensation program can support the strategic evolution from traditional licenses to subscription-based (SaaS) models. Wall Street and company valuation methodologies all seem to reward for it, and many have to come to label this the new “strategy du jour”. It’s not always the easiest change to make and the change itself may mean different things and have different implications to those espousing such a strategy. While each organization’s specific needs, opportunities, and intentions may be unique, there are a number of considerations that we recommend keeping in mind.

Subscription Sales – “New to Some but Not to Others”

It’s helpful to first realize that subscription or recurring revenue transactions may be somewhat new to software companies but they are not new to a wide range of industries. Consider insurance premiums that renew each year and thus represent run rate business. Or consider an organization that sells credit information to banks for loan processing; they buy that information each and every year. From the Consumer Packaged Goods space, channel managers who sell through retail chains clearly experience run rate revenue. For those who want to go way back and may have hoofed it as a newspaper delivery person, that too is a run rate or recurring revenue model. I recall getting my $1/month for each house on my route; I didn’t know I was on the cutting edge of strategic evolution. The key distinction is a company serving as an ongoing supplier of products or services versus a company with one-time or intermittent purchases. Clearly, many industries have been wrestling with this topic for a long time, while some software organizations are facing it for the first time, at least for software licenses although not necessarily for maintenance and/or services.

In some of these industries, such as insurance, compensation is paid on the run rate business, which creates a familiar annuity stream that is often common and accepted. In some worlds, these plans will utilize a hard threshold (compensation payouts occur only after a certain point of results) or a soft threshold (compensation payouts start at first dollar but at a lower rate and increase as results progress toward a performance expectation or goal); these pay line features can help focus sales energy on the portion of the achievement curve most under a rep’s control, e.g., where they control protection and growth, rather than purely absolute volume. These are not necessarily models that the software industry typically tries to emulate nor should, but it’s a good reality check to understand that the situation is not truly new.

Software and the Focus on Bookings

Software is one industry with a legacy of paying on bookings. Compared to some pure revenue based models, paying on bookings or contract signing more closely ties the compensation payouts to the software license sales directly under a salesperson’s control. Folks often feel booking-based plans create more sales energy, inspire more motivated reps, and align to exciting sales cultures. And bookings of course avoids the annuity feel in high run rate models and avoids the challenges of using thresholds to create the right energy. [One side note of course concerns the need for role clarity and who supports new vs. existing accounts, but that’s broader than this article and is best left for another day.] In terms of sales comp practices, we find software organizations are most interested in continuing to pay sales incentives on some form of booking, and so most designs attempt to align to this objective. But how and where do subscription licenses fit?

Software Evolution Part I – “Living in Both Worlds”

In many cases, when software companies talk about evolving from traditional licenses to subscription licenses, they rarely mean a sudden and wholesale change from selling perpetual licenses to term and/or SaaS. Particularly in large software transactions in a B2B space, we find most companies really mean they want to support a customer buying the software in any number of ways – perpetual, term, or SaaS. The organization wants to support any and all software license sales, while still encouraging a steady and gradual migration toward subscription deals. Even then though, many acknowledge that customers need to be allowed to buy the way they want to buy, or some competitor will swoop in and offer the flexibility the customer desires. In these cases, the most important feature of a sales compensation plan is that it does not push a salesperson to force a customer to buy in an uncomfortable way.

One important concept companies consider is how to create deal neutrality or deal agnosticism for the sales rep. This means that no matter how the customer wants to buy, the sales credit and the incentive payment is kept relatively consistent. If we pay the same effective commission rates for a perpetual deal vs. an annual license, it’s easy to see the rep will only push for the much larger perpetual deal. Poorly designed sales comp plans can sabotage rather than enable an evolving subscription strategy.

One of the most common approaches is to find way to normalize the credit of each license. One technique is to decrease the sales credit for a perpetual deal to align to the Annual Contract Value (ACV) for comparable subscription deals. We also of course need to consider how to handle Maintenance as well as Professional Services, all under the construct of paying on bookings. In the space below, we provide an example of how one organization chose to create deal neutrality.

This table was specific to one organization’s business and will almost surely not be perfectly applicable to another. But the overall concepts are worth consideration. This client determined their Core Crediting Rules based on a historical analysis of prior deals and an estimate of how they could create deal neutrality for future deals. The salesperson was basically kept whole in terms of sales crediting and compensation, regardless of how the customer wanted to buy.

In other cases, we’ve seen examples of crediting rules that slightly overvalue the results for SaaS versus traditional licenses. Or we’ve seen crediting upticks on the ACV value based on the number of binding years in the contract. Again, each case is different, but the overall concept is one of the better sales compensation practices companies should consider when moving from traditional licenses to subscription based opportunities.

Software Evolution Part II – “Diving in with Both Feet”

In much less common cases, a company may simply decide to actively end sales of traditional licenses and move 100% to subscription based sales. The case of Adobe several years ago is one commonly cited example where an organization made an aggressive and near full scale move. In these cases, the necessary sales compensation plan design approach still goes back to best practices – identify the right measures, determine the best mechanics, and work on the plan details to accomplish your objectives. In many ways, companies that go in with both feet are resurrecting as pure play SaaS organizations, and terms like MRR, QRR, and ARR will all arise. In reality, the building blocks of an ACV based plan, potentially with crediting upticks for multi-year results can still work quite effectively. ACV and SaaS sales often go hand-in-hand.

Overall Impacts – “Be Careful What You Wish For”

In most cases we’ve encountered, strong early enthusiasm to move toward subscription based deals ends up waning a bit as repercussions are assessed. There are usually significant revenue recognition impacts in the current year. Companies like Adobe had to prime the market to understand that near term revenue may drop to gain the benefit of steadier and longer-term results. We’ve seen this effect even in privately held companies as no one wants to miss overall financial targets or see near term increases in the expense to revenue relationship, even when considering the future benefits that subscription-based results can offer. Patience is rarely a virtue in today’s modern world.

As one recent client told us, “We can’t kick our addiction to end-of-year perpetual deals!”. We hear this quite often. There are cases where a company’s leadership may simply need or want to have a deal taken perpetually versus sticking to the steady subscription strategy. In such cases, having a deal agnostic sales compensation plan can ensure the sales representative is willing to follow whatever directions he or she is given. The right plan can align overall strategic vision, pragmatic in-year revenue recognition requirements, and the resulting sales compensation payouts. It can also work for the customers who are allowed to purchase the way they desire. Ultimately, we believe the best sales compensation plans work for the company, the sales representative, and the customers as well.