Moving to the Cloud? … Change your Comp Plan

Over the years, I’ve had several sales managers tell me their sales people are “coin-operated”. In other words, they are motivated purely by their pay packet. So all you need to do is give reps a sales target, give them a commission plan, and set them loose (and the good ones will deliver the results).

But what if your commission scheme is the very thing preventing your business from being successful? In today’s article, we’re going to analyse the benefits and pitfalls of varying commission schemes, and explore some ideas for vendors, and solution providers/VARs, around creating compensation plans that produce better results.

I think we can agree that reps don’t wake up every day thinking about how to achieve your corporate goals. They’re focussed on what they need to do to hit target, and how they maximise their commission.

So a good compensation plan should both reward success, and also help identify non-performers. But equally, a compensation plan should reward sales people for doing the right thing. There are countless stories of poorly thought out commission schemes that have produced unintended consequences from innovative sales teams finding shortcuts.

Now, when the sales process is established, the likelihood of unintended consequences is lessened. We have historical sales data, examples of best practices and an existing customer base, so we pretty much know what to do to achieve results. But when the business model is untried or untested, the chances of getting it wrong are much higher.

Which is what I see in companies transitioning to the cloud.

Compensation models that worked beautifully in the traditional CapEx model are producing unintended consequences for the new OpEx model. Let’s explore this for two different types of organisations – Vendors and Solution Providers.

Implications for Vendors

Some of the biggest vendors I’ve worked with owe much of their success to a really strong Enterprise Sales Team. This team may not actually sell direct, but they’re responsible for uncovering larger opportunities, harnessing internal resources and working with partners to close the deal. They typically operate on Named Accounts, and are paid on a quarterly result.

The problem is that this approach doesn’t work as well in a Cloud or MSP model. When enterprise customers purchase the product as a service through an MSP, it’s likely the sale won’t appear on the rep’s figures (because the MSP is recognised as the customer) and the revenue in the first quarter is now a fraction of the revenue that the rep would have achieved if it was purchased outright as a product.

In fact, I am aware of organisations where perpetual license teams have poached subscription license clients (and convinced them to pay a lump sum to own the software) in order to achieve their targets.

So unless vendors realign the compensation plans so that a rep is compensated equally for selling Monthly Recurring Revenue as the equivalent lump sum up-font-purchase, then we will always get resistance from the sales team. Yes, I realise this comes with a risk if a customer exits a contract early, but this can be addressed through early exit clauses. A better way to think of this is not as overpaying sales reps, but rather as a business investment required for establishing a new business practice.

Implications for Solution Providers/VARs

Different Service Providers are at different stages of maturity. Some are in the early establishment phase, some are in rapid growth, some are trying to increase profitability, while others are trying prevent churn.

Consequently, a compensation plan should be aligned with achieving the corporate goals at a particular time. (Note: this may mean the plan has to change, such as when we move from growth to maturity). In particular, in the early phases, when revenue is small but growing rapidly, a compensation plan should really be about rewarding the behaviour that achieves results not the results themselves.

Here are 5 different models, with 5 different objectives:

100% commission up front (eg. the first month’s income as commission with no residual payments). This is ideal for new customer  acquisition, but can create a culture that is not oriented to customer service or retention.

100% commission on consumption (i.e. paying commission totally on a recurring revenue basis). This is ideal for customer retention and growth, but over time will mean that sales people are less likely to chase new customers.

Mix with more up front (i.e. higher percentage paid as commission up front, with smaller percentage based on the customers recurring revenue). Main emphasis is on acquisition, but also drives retention.

Mix with less up front (i.e. lower percentage up front, with higher percentage based recurring revenue). Some acquisition, but focus in predominantly retention and growth.

No commission (i.e. reps on a fixed salary). This is better for customer retention, although it can also be applied to acquisition. This model reduces “bad” behaviour, but can be very challenging to manage.

In the end, alignment is the key word. Your reward system must align with the behaviours you want, which must align with your company goals. And if compensation doesn’t change, nothing does.