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Creating Cloud Compensation Plans

July 15, 2014 - Article

Ken ThoresonBy Ken Thoreson

Cloud is a game-changer. Building a quality-focused cloud practice can position your firm for tremendous growth. But as you consider moving into cloud, questions will arise regarding its impact on business planning, on marketing and sales strategies, and, eventually, on sales compensation. Let’s skip to the end and discuss how cloud changes how you incentivize and compensate your sales force.


Setting Strategic Objectives

First, it’s important to understand that sales compensation is strategic, not tactical. You must define the strategic objectives for your organization or the cloud practice. To do so, ask the following questions:

  1. Are you using cloud services simply to increase market share with a loss-leader mentality?
  2. Are you opening a new practice with intentions to sell new services into your existing customer base?  
  3. Are you shifting your entire organization’s focus to a cloud-based offering?

Once you're clear on your strategic objectives, you can begin to build a sales compensation plan for your cloud practice.

Building a Cloud Sales Compensation Plan

When building a compensation plan, a common question is: "Should you have differing compensation plans for different practices?" The answer is, “It depends." Each product or service may offer a differing margin and have a differing objective. In order to maintain an appropriate cost of sales, compensation plans need to take these variables into consideration.

Ultimately, compensation plans should be simple in design but complex enough to achieve your goals and reward performance. Let’s look at an example based on some simple assumptions:

Assumptions. Thinking back to your strategic objectives, let’s assume you are creating a new practice wherein you are reselling cloud services. You might receive a 12 percent per-seat commission the first year and a 6 percent residual for subsequent years. You also could earn a different monthly commission/margin for a cloud disaster recovery solution, plus fees for migration or professional services. Recurring revenue changes sales compensation planning from a cash-flow perspective, but not from a goal perspective. Plan for customers to stay for two to three years (based on the initial contract term or term plus renewal), and calculate compensation plans based on the total contract value for that period.

Recommended Plan. Validate your objectives with a compensation plan that's not only cost-effective, but also rewards success. Specifically, we would recommend a plan with three variables:

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