You have a new sales role on your team. Maybe it’s your company’s first foray into Inside sales, or maybe you just approved a requisition for a new channel manager role, or maybe you’ve just hired your first sales person. Even if your business has several sales roles already, when you have a new role you’ll probably need a new compensation plan.
In this article published by WordatWord in the Sales Compensation Focus, Donya shares the nine key steps to get that comp plan right.
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Or download a copy of it here.
It’s usually important to have the sales executive measured similarly to their sales team. So if the sales team’s primary measure is Revenue, then the sales executive should also have significant variable pay based on Revenue. But it’s also reasonable to hold the sales executive accountable for measures directly influence by their team that are a bit closer to the income statement results, like Contribution Margin. Contribution Margin in a sales executive plan is generally defined as [Revenue] – [Cost of Goods at Standard] – [Directly Controllable Sales Operating Expense]. And that last one generally includes sales compensation and the expenses directly incurred by the sales team like travel and entertainment and possibly samples or other similar items. Measuring the sales executive on the same measure their team has is important for alignment, and the individual contributor sales people like knowing their leader shares their measure. But it’s also appropriate to hold the leader accountable for the marginal contribution of the group.
The next consideration is whether to include business unit or company level measures in the sales executive’s plan. If the sales executive is primarily accountable for sales results, and also sits on the leadership team for the business, then it may or may not be appropriate to include the same measure that you’d find in the comp plans for the rest of the executives. However, if the sales executive is more focused on the overall direction and strategy of the business as a key contributor to decisions affecting multiple functional areas of the business, it would be appropriate to have as much as half of their variable pay aligned with the same measures the CEO/President might have in their plan (EBITDA, free cash flow, etc.). And if the sales executive has a substantial role in the running of the business, then equity compensation in alignment with that offered the rest of the senior team should also be included.
Sales Compensation in a Recurring Revenue Business
If you are helping with the design of the sales comp plans in a recurring revenue business, you may have your hands full. Are you serving as referee between advocates for ACV (annual contract value) and those supporting TCV (total contract value) as the correct measure of sales performance? Do you understand the relationship between MRR (monthly recurring revenue) and RR (recognized revenue) and how the magical number, 78, ties them together? And what about churn, term, and your cost of capital?
The world is discovering the magic of the recurring revenue business model. And you may be discovering the challenges of compensating sales people who are selling these deals. While many software companies are making their first forays into this area, other industries like telecommunication and waste management have been living there for decades, and have a great deal to teach us about what to measure, how to comp, and what to watch out for.
Check out this practical session that will provide a grounding in best practices for sales compensation plan design in a recurring revenue business. We look at the best primary measures of sales performance, and the necessary secondary measure. We consider common mis-steps in these plans from measuring on total contract value to long annuity “tails” on the comp plan.
You can create a terrific sales comp plan that focuses your sales people on the right sales at the right cost of comp for your business. View the webinar to learn how.
For a downloadable copy of the presentation a few links to other great related content, see this page.