I recently took my two sons to the planetarium show at a local museum. We sat together in the darkness, unable to see our hands in front of our faces, and got lost in the allure of the night sky: planets, constellations, comets and the spectacular collisions that happen when two objects try to occupy the same space at the same time.
Those collisions took me back to the late ‘90s, shortly after I joined a telecom reseller. We were rapidly growing, expanding our portfolio into hardware and IP telephony. As we designed our comp programs, we intentionally focused on total customer monthly recurring revenue (MRR) to offer the promise of unlimited earning opportunity, which we were certain would attract the sales talent required to drive our growth. And yet time after time, I watched proven “hunters“ begin to focus on renewals and client service, ignoring the upside from new logos or the one-time payouts from our new hardware solutions.
As I think about my current clients, many of whom are contemplating how to compensate subscription sales like software as a service (SaaS) or struggling to manage compensation for both subscription and one-time sales, I can’t help but think of that experience. The specific challenges vary, and while best practices and benchmarks are helpful, there is no silver bullet to solve these issues. But there is a blueprint—a constellation of five points that will help you get this right, and avoid the collisions that can obliterate a sales team.
1. Organizational Strategy and Priority
A compensation plan must support the organization’s strategy, objectives and priorities. The plan must balance short-term bookings, revenue and profit targets, and growth expectations by solution area, while creating a foundation for long-term success. It’s no easy task.
Foundational decisions that form the basis of a good compensation plan design include organizational culture, sales (bookings) and revenue planning, target setting, portfolio priorities (e.g., should we focus on SaaS or license?), conversions and cannibalization, change management and transition planning.
2. Customer Coverage
Those collisions when I worked at the telecom reseller illustrated the power of incentives to drive behavior, and the reality that you get what you pay for. We hired hunters, gave them prospects, talked all day about new logos. Yet a plan based on total MRR made retaining the base annuity more of a priority than new logos or the one-time payouts from new solution areas. In essence, that comp plan made them behave like farmers.
Tech companies go to great lengths to develop the right blend of generalists and specialists to sell across products, industries and customer types and to define the specific responsibilities of each during the sales process. As a result, we should think differently about looking at sales professionals as specialist versus generalist, or a pure hunter versus a farmer who owns acquisition, expansion and retention using the entire portfolio. Decisions and expectations around role and responsibility of design, allocation and territory definition are instrumental in ensuring a plan that enables, rather than destabilizes, the intended organizational design.
3. Plan Metrics and Deal Valuation
If there is a single benchmark that most organizations seek, it is the metric. But aligning the organization and its related processes (e.g., quota setting) with the right metrics is not simple. There are industry norms for metrics like MRR, as well as personal perspectives on metrics and legacy systems that are entrenched regardless of their effectiveness. Changing these can be difficult—for stakeholders, new metrics may be seen as too significant a change, happening too fast and simply unwelcome deviations from a comfortable routine.
But while foundational measures like MRR and annual revenue or contract value are most prevalent for subscription sales, there are alternatives (e.g., total contract value), secondary metrics (e.g., total billed revenue) and metric variations (e.g., term multiplier adjustments). Organizations, particularly those with competing models, need to consider single versus discrete measure trade-offs, as well as organizational culture, simplicity, valuation and what is appropriate based on the role and engagement process.
4. Sales Crediting
With metrics that can support the strategy, role and engagement process, the final decision is determining when and how a sale becomes commissionable. Crediting challenges related to subscription sales typically fall into one of three categories: lack of visibility, financial alignment and salesperson motivation.
It is easy, for example, to aspire to pay all hunters on sales within a defined territory at the time of the sale and for the full value of the deal. Doing so, however, assumes the company has this ability and is financially indifferent and open to certain levels of risk. It is important to explore visibility challenges, credit timing and splits, revenue recognition rules, organizational versus individual alignment and compensation cost of sales, and to look at how each of these factors helps establish a practical, transparent and motivational crediting policy.
5. Planning and Operations
Ultimately, the real value of a compensation plan design is measured by how it’s received, understood and trusted by the sales teams. Poor communication, black boxes, a lack of visibility and calculation errors can create significant distraction or disruption in the field. Because of this need to connect with sales teams, effective and efficient plan administration must be table stakes.
Organizations, partners and strong salespeople will also require an ability to understand the impact of product forecast or mix changes, sales coverage, territory, quota or crediting changes, and how transitions will roll out when changes happen.Compensating subscription sales can result in nuanced plan mechanics or tracking requirements resulting in complex plan administration. Organizations that are able to manage this have typically invested in robust platforms to provide confidence, efficiency and insight. Done wrong, collisions will erupt all around you. But if you get your compensation for subscription sales right, you’ll see a spectacular show light up across the widest reaches of your universe.