Sample Sales Compensation Plans Volume 1 [email protected] 650-395-8301 http://newsigma.com http://salescompinsights.com Included in This Material  Sample Sales Compensation Plans: − Business Services − Software − SaaS − Communications − Distribution − Medical Devices www.newsigma.com Page 2 Business Services Solution Approach Account Manager Background and Issues The company is a $1 billion in annual sales technology outsourcing firm. Its core business, IT staffing, is profitable and responsible for the majority of the company’s cash flow. However, an influx of lower-cost competitors is driving down the margin of the core business . Management needs its accountmanagement field sales force to grow project-based business and outsourcing contracts. The current incentive plan provides Account Managers a variable rate of commission on revenue generated throughout the life of a contract, with the rate based on gross margin of the service delivery. Issues include: • Flat growth over five-year period • Reliance on core business • Little urgency to close new contracts given the commission streams from previously-sold, longterm contracts Requirements for a new incentive plan included: • Premium paid for new contracts and higher-value deals (multi-year, high gross margin) • Discount for core business • Overall growth in account revenue Management constructed the following plan components: Plan Component Description New Contracts Commission • % on new total contract value (TCV), up to annual New TCV quota; • % over-quota rate • % credit on booking; % on launch Gross Margin Multiplier • Applied to commissions earned above based on margin achievement • Sliding scale for points in between Revenue Quota (new contracts and renewals) • % of a target bonus for attainment between threshold and 100%; >100% = accelerator • Minimum performance threshold www.newsigma.com Software Solution Approach Business Development Background and Issues The company develops business intelligence software for medical and scientific use. It recently acquired a similar-sized firm and integrated the two sales forces. Each sales force used a different compensation approach. The acquired company paid its business development (BD) reps on monthly recurring revenue (MRR), while the acquiring company paid the same role on expected gross margin at contract booking. The mix of new business versus existingcontract renewals varied significantly across territories. Other issues included: • • • • Different levels of renewal complexity – some are automatic, others like selling new business Limited focus on services Lack of upside pay opportunity for high performers Lack of transparency and history tied to contract gross margin Management needed one sales compensation plan for the two groups of BD reps; requirements included: • Simple yet flexible structure to accommodate the different mixes of business across territories – Allow managers to adjust the measure weights and payment rates based on each role/assignment • Minimum performance requirements for services revenue Components of the new plan included: Plan Component Description New Business • • • • Renewals www.newsigma.com • • Based on total contract revenue value (TCV) booked for software and services % of target incentive paid for each percent software and service quota attained Accelerator for software and service attainment >100% Accelerators for software attainment >125% and > 140% Based on attainment of an annual renewals revenue goal % of target incentive paid for each percent renewals goal attained SaaS Solution Approach Account Management Background and Issues The company generated $150 million in sales last year offering cloud-based applications to help enterprises optimize their marketing and sales channels. Its challenge confronting the new year was sustaining growth. Customer churn increased while many account managers complained about lower commission rates for some revenue streams in the current year’s plan. Other issues included: • • • Lack of role clarity between sellers focused on current accounts and new business from prospective accounts Lack of urgency on new business – rep complacency due to sizable commission streams from prior-year deals Administrative complexity and lack of rep understanding due to multiple payment schedules and rates applied to various revenue opportunities Management clarified the rules of engagement for account managers and new business reps; requirements for the new account manager plan included: • Payments tied to goal achievement to encourage retention and growth from current accounts • Payments tied to first-year annual revenue realization (ARR) and renewals • No more than three components in the plan Components of the new plan included: Plan Component Description Monthly ARR Quota • • • Quarterly ARR Bonus Services www.newsigma.com • Based first –year annual recurring revenue (ARR) booked each month relative to a monthly quota % of target incentive paid for each % of quota up to 100% -- accelerators for performance above quota No cap • Based on attainment of a quarterly, YTD ARR quota Bonus for attainment of Q1 quota; increased bonus for attainment of the cumulative Q1+Q2 quota • % commission on all services revenue Communications Solution Approach Territory Sales Rep Background and Issues The company is a $250 million regional provider of telecommunication, digital and internet services to residential and small-business customers. While the company experienced steady revenue growth over the prior five years, its territory sales representatives as a group often earned above their target incentive amount while the division missed its revenue goal. Features of the current plan included: • • • Commission-per-product-unit sold, with various rates depending on the product or service type sold No minimum performance requirement for payment (pay on first dollar sold) Quarterly bonus based on customer churn levels The quarterly churn bonus measured customers acquired over the prior 12 months. Reps complained the company’s accounting for this was incomplete and felt compelled to monitor installations and customer service issues, which impacted new acquisition productivity. Management established monthly revenue quotas for reps that aligned with the division’s quarterly goals. It eliminated two-tier pricing and the quarterly churn component after determining territory reps could only reduce churn by offering promotional pricing. Requirements for the new territory sales rep plan included: • 100% of target incentive tied to revenue goal achievement • Quotas based on top-down allocation, target product mix and average revenue per unit (RPU) • Minimum performance threshold; no cap Components of the new plan included: Plan Component Description Monthly Revenue Quota • • • • • Quarterly Consistency Bonus • • www.newsigma.com Based on contract booking value Minimum performance for payment; % of Target Incentive for each % quota up to 100% Target incentive for 100% quota Accelerators above quota performance Paid monthly Bonus per quarter for quota achievement in all three months of the quarter Lower payment if 2 out of 3 months achieved Distribution Solution Approach Inside Sales Specialist Background and Issues The company is one of the largest IT wholesale firms, with global distribution and over $20 billion in sales annually. Its inside sales specialists (ISS) manage sales of particular product categories for a targeted account base. The ISS has significant pricing autonomy, often functioning as a broker to manage supply and demand between hundreds of manufacturers and buyers. The company moved to a goal-based incentive approach after struggling to manage target compensation levels using a commission approach. It also struggled to manage ISS compensation amounts associated with manufacturer-funded campaigns (spiffs). Some ISS reps focused almost exclusively on spiffs to maximize their income. The company needed to manage spiff funding and better balance ISS focus between revenue volume and price protection. Management set monthly revenue and gross margin goals for each ISS assignment, and negotiated with manufacturers in order to govern spiff programs and limit the total amount each ISS could earn from spiffs. Management needed a dynamic approach for balancing ISS focus and earnings between revenue volume and gross margin percent. It devised a matrix allowing for monthly adjustments to the incremental payments for revenue and margin, depending on the relative priority across product category in any given month. Components of the new plan included: Plan Component Description Monthly Revenue Quota • Payments based on percent of revenue and gross margin goal attainment GM Percent of Target Incenitve Goal +2 Excellence Goal +1 Goal Target Goal -1 Goal -2 Threshold Goal -2 Goal -1 100% Goal +1 Goal +2 Revenue Goal Attainment Monthly Campaign Fund (Spiff) www.newsigma.com • • Opportunity for % of monthly target incentive Requires a minimum % of target matrix earning achieved for Spiff eligibility Medical Devices Regional Sales Manager Background and Issues This medical capital equipment company doubled in size when it acquired a manufacturer of medical disposables. The company’s regional sales managers (RSMs) now supervised two disparate sales teams – one responsible for capital equipment and the other for disposables. A third role reported to the RSM – one responsible for both capital equipment and disposables. Due to the degree of change going into 2010, the company decided to leave unchanged the commission compensation approach for disposable reps. It paid capital equipment reps on revenue goal attainment, with half sales credit earned at contract booking, the other half at installation. The mix of growth opportunity between capital and disposables varied considerably across regions. The company needed to set revenue goals for the two business units and allocate those goals to each RSM. www.newsigma.com Solution Approach The company devised a goal-based incentive approach for RSMs, whereas each RSM earned their target incentive amount for attainment of a capital equipment and disposable revenue quota. In addition to region-specific quotas, the company adjusted the amount of target incentive dedicated to each quota based on the relative priority between capital and disposable sales in reach region. The plan used one payment schedule for both capital and disposable components, which included a threshold and multiplier above quota. To help ensure disposable reps attained minimum performance standards, the RSM plan included a component for individual rep quota attainment. Plan Component Description Quarterly Capital Equipment Sales Quota • • Quarterly Disposable Sales Quota • Quarterly Team Attainment Breadth • • Based on the region’s capital equipment sales relative to a quarterly goal Weight is assignment specific Based on the region’s disposable sales relative to a quarterly goal Weight is assignment specific % of the quarterly target incentive based on the percent of total team members hitting or exceeding quota