It’s sales compensation planning season! Insight Partners and QuotaPath, a sales compensation management platform and Insight portfolio company, recently hosted an event with 150 revenue leaders from some of the fastest-growing ScaleUp companies. Of the many discussions, topics like how to attract and retain sales talent and the principles of sales compensation design were top of mind.
Based on the discussion, here are 4 learnings to consider as you plan for next year.
Learning #1: Draws (and alternatives to draws) give reps time to ramp up
Draws are effectively an advance or loan against future, unearned sales commissions to allow reps to earn their variable pay while ramping. (Remember, it can take 6-9 months in SMB/mid-market and 12 months in enterprise for a rep to be fully productive). There are 2 flavors: Recoverable draws must be returned if the rep fails to later earn her commissions; non-recoverable draws the rep can keep even if he fails to later earn those commissions. If you do not offer them already, consider draws to allow for a smooth transition as reps onboard, learn the products, grasp the sales pitch and messaging, and build pipeline.
If draws are not a fit, there are other options.
One is a ramped quota, which prorates the full quota based on their ramp time and how long they will be on quota for the year. Keep in mind, this only helps compensation levels if the comp plans pay based on quota performance.
Second – and less common – is an MBO (management by objective) plan during the ramping period. For instance, new hires earn their variable by earning training certifications, completing mock demos, holding discovery calls, generating qualified pipeline, or progressing deals from early to late stages. 3 tips for choosing these objectives:
- Choose leading indicators of future success (i.e., they actually drive bookings);
- Ensure they cannot be gamed (e.g., that a rep cannot artificially inflate pipe gen);
- Your team must commit the required bandwidth to write, approve, and grade performance against MBOs
Lastly, tools like SetSail (an Insight portfolio company) offer micro-incentives as reps achieve specific milestones. Each micro-incentive reinforces desired behaviors and improves rep and team performance.
Learning #2: Compensating AE’s on renewals might make sense
As companies scale, renewing your customer base becomes even more important. Responsibility for renewals depends on your GTM organization: earlier companies might have AEs owning renewals. In more mature companies, customer success managers, account managers, or renewal managers might own renewals.
Therefore, first determine who is accountable for the renewal number. Since it might involve multiple roles, it is key to clarify the primary owner. If the AE can influence the renewal, it is safe to include renewals in their variable compensation; however, if the AE is solely focused on new business and you have other roles responsible for renewals, don’t dilute their plans by adding renewals, as it will distract them from new ARR.
If AE’s influence renewals and you want to incent them, here are a few options:
- Flat rate. Provide a flat commission rate on the renewal ARR. This is the simplest method and is best when you want to keep reps focused on new ARR, but the AM or CSM team is not capable of handling a specific subset of renewals. This flat rate should be low (e.g., ¼ of their rate on new/expansion) and make sure you monitor the volume of renewals that AEs work on to ensure the sales organization is still primarily focused on new business sales.
- Renewal quota. Provide a separate quota on renewals in addition to their new ARR quota. This is appropriate when you don’t yet have renewal-focused roles (e.g., CSMs) and sales reps are reliably involved in a significant number of renewals (and must make time for them). Careful setting quotas if (a) customers renew early or (b) a significant number of renewals are auto-renewal.
- Special bonus. Pay a bonus for working on specific renewals, manager-approved. This method is best when, like option 1, the AE does not usually do renewals, but extraordinary circumstances call for their involvement (e.g., a strategic customer’s renewal with a heavy competitive presence).
Learning #3: Incent for multi-year contracts to drive bigger deals and improved retention
If a rep cannot influence the term of a contract, then multi-year incentives are not necessary. But if a rep’s involvement can lead to a longer-term contract, consider multi-year incentives. Multi-year deals have many benefits: you’ll see lower annual churn because fewer customers will be up for renewal in a given year; in negotiations, reps can get a ‘win’ in return for a discount; and you can improve cash flow if the customer pays up-front.
Below are 3 ways to incent multi-year contracts:
- Higher commission rates. For example, if the base commission rate is 10% of ARR and your average term is 1-year, pay 13% of ARR for 2-year deals and 15% for 3-year deals. This aligns incentives and is manageable to administer. (Note: we recommend retiring quota on only the annual or year 1 amount).
- Commission years 2+. Pay a bonus with a lower commission rate on the contract value of years 2 and beyond, while still retiring from quota only year 1’s ARR. This is easy for a rep to understand but can be difficult to administer, and this is best for when year 1 ARR is different from years 2+.
- Pay on TCV. Commission the total contract value (TCV). This is the most lucrative design, and therefore the most expensive. And if you retire quota on TCV, you will have to set quotas on TCV, too, which is very complex. Since TCV provides such a strong incentive on term, be careful that your reps will not sacrifice annual amounts in return for contract term in negotiations. This design is the riskiest way to incent for multi-year.
Learning #4: Some compensation design principles hold true no matter what
Beyond the trends, a few design principles are useful in any sales compensation plan, which will help you to maximize rep productivity, hit your company objectives, and build a pay-for-performance culture:
- Simple is better. Keep plans simple so reps understand their plan and how to maximize their earnings. Complicated plans create confusion, and commonly drive unintended behaviors that are not in line with the intention of the plan.
- Align comp plan to strategy. Sales comp is the caboose, not the engine. Define a clear company strategy first, then design the plan to reinforce that strategy.
- 3 measures max. Do not exceed 3 measures on a plan, and each measure should be weighted 20%+ to ensure the rep focuses on it.
- Lucrative accelerators to reward high performance. More than 80 percent of companies have sales accelerators, according to a survey by QuotaPath and Pavilion. Top performers should be rewarded to encourage superior performance, to retain them, and to inspire others to overachieve.
- Get plans out on time. Try to release plans during sales kickoff. At the start of the year, reps should know the company’s strategy, how the plan pays them for the behaviors that align to that strategy, and how a rep can maximize their compensation under the new scheme.
2023 is different: How to handle economic uncertainty
With rising interest rates and other economic headwinds in store for 2023, your focus has shifted from growth to efficient growth. As part of sales compensation planning, consider the following:
- Analyze your Compensation Cost of Sales. For every dollar of ARR you bring in, how much are you paying commercial teams? Does that cost structure align to your company’s financial goals? What happens to CCOS if performance is lower than expected?
- Scenario plan for deteriorating economic conditions. It’s better to have a plan and not need it than need a plan and not have it. What performance indicators (KPIs) will inform us if a plan or quota reset is needed? How might we reset annual quotas or re-balance territories after H1? What on-strategy SPIFs could we roll out to keep reps whole if performance is very low.
Arguably, the most valuable resource in your entire GTM is your seller’s time. By nailing your sales compensation plans, AE’s will spend their time in the right areas, which in turn accelerates growth and achieves the company strategy.
This article was co-authored by Kelly O’Halloran at QuotaPath. To discover, compare, build, and customize compensation models visit Compensation Hub, a new, free resource from QuotaPath. And, to learn more about QuotaPath’s compensation and commission platform, book a time to chat!