Compensation Drives Behavior

 

For example, a bonus within the comp plan rewarding the acquisition of a net new customer (versus an expansion at an existing customer) instructs the salesperson that a dollar sold to a new customer is more valuable than a dollar sold to an existing customer.  Is this bad?  Of course not, because a growing SaaS company, at a minimum, should be getting 50% of its ARR (Annual Recurring Revenue) directly from new customers (ideally, the data supports the view that a SaaS company that generates 70% of its ARR from net new customers earns a significantly higher multiple of sales at exit).  New customers are the lifeblood of a growing software company (net new customers that are "brand names" are worth more to an acquirer than a smaller net new company).  

 

Of course, it is a long standing belief that the more a salesperson sells, the more he/she earn in commissions.  Is this bad?  Of course not, because the better the salespeople perform, the better the company performs.  Naturally, there must be alignment between salesperson metrics and overall company metrics.  For example, if we accept that salespeople should be paid based on their performance, that also means that if they don't perform well, they should be compensated accordingly.  One way to use the comp plan to drive the behavior we want is to leverage a comp plan tactic commonly referred to as "accelerators" and "decelerators" which generate a higher commission rate as the salesperson achieves certain revenue thresholds.  In other words, for a salesperson who might have a quota of $1 million in ACV (first year annual contract value), the first $400K might have a lower commission rate than for $400K-$700K, a higher rate for $700K-$1 million and an even higher rate for selling more than $1 million.  Mediocre performance under this approach leads to mediocre commission, while superior performance yields a superior commission.

 

In the spirit of "all dollars are not equal", there are other ways to drive the desired sales behavior.  For example, one approach is to incentivize the sale of new or slower selling modules or products at a higher rate than for longstanding or more popular products.  At a minimum, this will bring more attention to those products with sales incentives and, hopefully, drive the intended increased sales of those products, making the incentives worthwhile.  Having quotas for specific modules/products also helps maintain a focus on the incented products/modules.

 

Meanwhile, the question of how to incent new revenue vs renewal revenue is an oft-debated one.  Should renewals be counted toward quota, or should renewals be a separate category?  My viewpoint is that renewals are a critical component of ARR and need to have maniacal focus.  It does little long term good for the company to work so hard to close a deal, only to attrit it after the original term; however, it is easier to renew a satisfied customer than it is to sell to a new customer, so the commission rate for renewals should be dramatically lower.  The target for renewals should be a minimum of 90% of all renewals, so it is a good metric to use for commission purposes.  In other words, each salesperson gets a renewals quota of 90% of possible renewals in his/her territory and achievement of that metric generates a certain commission/bonus.  

 

Ultimately, there are many ways to drive the sales behavior we want to achieve, but having a comp plan that reflects that behavior is a simple way to achieve alignment.  The comp plan tells the sales team what leadership wants them to do and on which products to focus.  So, I ask again: is it bad that compensation drives behavior?  Again, I think not.

 

If your SaaS company wants assistance putting its comp plan together, please reach out to us at dave@moicpartners.com or chip@moicpartners.com