Guest blog by Seth Ellertson, Director of Sales East for Sage CRM
As Sage is rapidly approaching the advent of our new and exciting cloud offering for SalesLogix CRM, we’re tasked with advising our partners on how to appropriately motivate and compensating their sales people in this new world. While there is no question our partner and customers are anxiously awaiting our new offer, I can’t help but think that this changes the game for sales compensation. The old days were easy – you gave a sales representative a quota for license sales and paid them against achievement. It was really that easy. The only real question was how much to make their quota and how much to pay them, but of course that could be solved pretty easily by some revenue and cost modeling done by accounting people much smarter in the ways of finance than myself. Sales people had a license revenue target that they achieved by securing upfront software license purchases.
The SASS and Cloud offerings require a bit more thought, although according to Joel York in his March 2010 article SaaS Sales Compensation Made Easy, “The ONLY difference between SaaS sales compensation and sales compensation for software or other products is that you should pay based on the “LIFETIME VALUE of THE DEAL” instead of the unit price of the product. Unfortunately, It didn’t appear that simple from the rest of his article. Joel actually goes on to talk about present values of annuity’s and other financial calculations that I just simply couldn’t focus enough of my attention deficit mind around in my most boring college classes. (Trust me there is a reason I’m in sales) Joel then goes to provide the following formula – SaaS Subscription LTV=RR = RR (1-a)/(1=i) + RR ……… ok, I can’t find the symbols on the key board for the rest of it. Needless to say that’s where Joel lost me.
So I started to think about all of the reasons that a re-occurring model was different from a traditional sales model and the questions surrounding the differences - Should a sales representatative be paid upfront despite the company receiving payments in monthly or quarterly increments? Do you pay on total contract value or reoccurring revenue? If you pay on reoccurring revenue how to you motivate someone to secure a multi-year contract. What if a customer cancels their contract? As I’m researching options, one thing continues to come to my mind –COMPENSATION DRIVES MOTIVATION.
As we’ve rolled out dozens of different sales models over the years the only real question that sales people have is – what exactly do I need to do to make exactly how much money. So what does that mean for a small business owner or a VP of sales looking to change a compensation model… well its simple I think (although I’m clearly not as financially educated as Joel) - First make sure the plan is easy to understand and calculate, remember us sales people like thinks simple. Second make sure that you align compensation with corporate goals. If your corporate goal is to acquire 100 new customers this year, then base a sales representative on customer acquisition. If your goal is to secure 5 million or 500 million in annual re-occurring revenue, then base them on those targets. The only real thing to be careful about according to Joel (yes, I really did read his whole article, it was quite insightful) is to make sure that you choose a time frame for the reoccurring target like monthly, quarterly and yearly and stick with that timeframe, as changing it periodically has serious impact.
So at the end of the day figure out a reoccurring revenue target by doing some projections and modeling and pay your people for achieving those targets. Couldn’t be easier… after all sales people aren’t compensated for managing cash flow they are compensated for closing deals.
I found a great quote in a pdf presentation I found on sales compensation -
“Most of the time was spent discussing our business plans and objectives and worrying less about paying too much or too little” Steve Balk, VP Sales, Dataflux
Steve, I don’t know who you are, but I like your style. I couldn’t agree with you more, although I selfishly favor paying salespeople too much. Lets figure out how to achieve our business objectives and if we overpay our salespeople a bit in the first year because we achieved those objectives – who cares, let’s just go sell!