By 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.
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:
Once you’re clear on your strategic objectives, you can begin to build a sales compensation plan for your cloud practice.
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:
1. Commission Option 1: Offer an upfront commission percentage based on the 12-month value of any sale of net new monthly revenue that combines seats and professional services. In addition, offer a lower monthly commission percentage on renewals; the renewal commission should be one-fourth of the net new revenue commission rate and be paid for only two years.
Rationale: This commission structure keeps the salesperson focused on a short-term goal of new sales but adds a reward for a continuing relationship with existing clients (getting the renewals). At the same time, it maintains a healthy cost of sales by not committing to a long-term annuity for the salesperson.
Commission Option 2. While royalties may be paid monthly, we recommend calculating the commission based upon an annualized revenue stream. In this scenarios, pay 50 percent of the commission upon the initial order or first payment, and the remaining 50 percent at the six-month anniversary. Then at the “renewal” of the second year, you would pay one final compensation payment. As an example: If you pay a 12 percent commission rate, you would pay 6 percent at the time of the order, 6 percent at six months and another 6 percent (or a lower rate) on the renewal.
Rationale: This plan allows the salesperson to be involved in the success of the implementation and focused on the renewal while avoiding an “annuity” compensation plan for the salesperson. It also is easier on your administration department.
2. Revenue Bonus. Offer an upfront commission percentage based on attaining certain quarterly revenue objectives for net new sales and renewals. This would include a ramped up or accelerated revenue plan and commission percentages with three break points. An example would be setting a quarterly goal of $50,000 net new cloud sales along with a year-to-date goal of $100,000 (set by quarter). If the salesperson hits this target, an additional of 1.5 percent commission could be paid. If he/she exceed those numbers, an additional 1 percent could be added to the bonus compensation.
Rationale: This plan will keep the salesperson working toward a larger goal even if one month fell below expectations.
3. Professional Services Bonus. Offer a quarterly bonus of fixed-dollar value that’s paid if a certain percentage of the total revenue achieved included a predefined professional services revenue objective.
Rationale: A bonus will keep the salesperson focused on including the proper levels of professional services while limiting your cost of sales.
Certainly every partner is different in maturity, size, geographic opportunity and mix of current services or product offerings. Thinking through all the variables for compensating your sales team will help keep sales efforts aligned with your firm’s strategic goals for the cloud.
Ken Thoreson is president of Acumen Management Group, which advises technology companies on strategic sales leadership and management and business execution. He also is the author of five books, including his latest title, “SLAMMED!!! For the First Time Sales Manager,” published in June 2014. Contact Thoreson for a free compensation assessment.