In a recent roundtable conversation, Grayson Morris, Performio’s CEO, talked with two thought leaders from The Alexander Group – Priya Ghatnekar, principal, and Elizabeth Watson, director. This blog post summarizes and condenses their discussions and recommendations for SaaS companies who are mulling changes to their comp plans.
Without question, this has been a challenging period for SaaS companies. Just as we’ve emerged from the pandemic, we’ve rolled into a recession combined with historic inflation. SaaS valuations have been cratering. The great resignation is happening. For SaaS companies aiming to adjust to this new playing field, the question becomes: What are the major issues in sales comp, and how should we tackle them?
Grayson
When the pandemic hit, almost everyone pivoted to the work-from-home paradigm – and it looks like some form of that will remain. What does that do to incentive comp plans?
Priya
First, I think it’s forced us to more clearly and precisely understand what each person’s role is, because the best compensation metrics tie closely into what we're asking each person to do. For instance, this new hybrid scenario is creating a role that’s new to many organizations: a product specialist who, in most instances, works entirely from home.
They dial into a meeting, explain the product, do the demo, and they’re out. That’s a nice boost in productivity. There’s less travel and more focus – and they could do 10 of those a day, compared to doing those on-site or in-person.
Grayson
Does that raise quotas across the board? Or does it depend on the industry and role? I could see both arguments: “Hey, you're working from home and not jumping on planes, so you’re more productive and your quota will rise.”
But it could also mean “Your close rate has gone down because you're not jumping on planes to visit customers.”
Priya
Quotas always seem to rise. But with higher productivity, we're seeing an uplift in the ask from our sellers. So a quota might go up X% – a little more than in the past, because the role is more focused, and you have more hours in the day to do it.
Elizabeth
The other source of productivity is the investments in technology and data that companies recognized were necessary once COVID-19 hit. Reps couldn't meet in person as often, but it also meant that they had more information at their fingertips.
We see more lead scoring tools and market intelligence data that we just didn't have in the past. We're bringing more data into the equation and applying newer, specific measures that we can track. The shift to working from home has driven a lot of that investment.
Grayson
Has productivity gone up across the board? Or does that vary by segment, such as SMB, mid-market, or enterprise?
Priya
It varies. The SMB space is a bit more transactional. You can make more sales calls, so productivity looks different than in enterprise accounts, where they're used to in-person attention. The shift has taken a little bit longer, but overall, productivity has increased.
By industry, I think of tech because, of course, they’re tech-savvy, and many had a running start well before the pandemic. They didn’t have to switch overnight to working from home and getting very comfortable with the tools. In other industries, such as manufacturing and distribution, there was more of a learning curve.
Grayson
It’s a very difficult hiring environment for SaaS companies – which I can personally attest to. How is this affecting incentive comp plans? And who's doing it right here? And who's doing it wrong?
Elizabeth
Our research has found that total cash is going up. Companies are being forced to provide larger total target compensation – and more of that increase is going into base salaries. The theory is that people want a bit more stability in their lives after the past couple of years – which is probably no surprise.
Grayson
How much OT has gone up in the last year or two?
Elizabeth
We're looking at up to 10%, depending on the industry.
Grayson
That doesn’t surprise me. So, if you were paying $250K for on-target earnings, you're now paying $275K, or maybe even $300K for similar roles.
Elizabeth
Of course, some of this impact is not just on OTE. When you’re building a comp plan, there are accelerated rates after you hit your targets. If you hit certain milestones, you have a higher earning potential. Two years ago, your top earners might have earned 2X the target incentive. Today those same top performers might earn 2.5 or 3X their target incentive.
Grayson
Are there any companies doing this poorly? Do you see companies make mistakes around incentive comp - things that actually increase turnover?
Elizabeth
Unfortunately, yes. So many on-the-fly changes – especially in industries that were really impacted by COVID – have led to higher levels of unintended and unanticipated turnover. Part of that is the hybrid or work-from-home models. People feel there's not enough clarity about how their comp is calculated or what they're paid on. That’s really impacting some of the turnover.
The other challenge – one that’s hurt by our volatile business environment – is quota-setting. People tell us they feel they just can't achieve their goals. Maybe you have a great OTE potential, but if you’re unable to get near the target, it’s demotivating.
And of course, you can’t focus solely on comp. There are other things that people want: the right working environment, career path, and other intangibles. So your potential earnings in today’s role matter, but you have to show them they can continue to grow and convey a picture of OTE in the future.
Grayson
Your point about communication is a great one. You have to over-communicate with the people out there in the world selling for you. They're sitting on their laptops at home, and you don’t want them to feel like they're on an island.
Elizabeth
Absolutely. When you have positive news, and you’re implementing positive steps – if it's not communicated appropriately, reps just don't trust it. They don't understand if it's not clear and transparent. You could be doing good things, and it still might have a negative perception.
Priya
The increased focus on training and career path development is something I haven't seen before. In addition to comp, you need to tell the entire team that you can continue to grow, that there’s a path for you. There have to be other selling points that surround the compensation plan.
A related way to slow your turnover is to make sure your managers understand the comp plan, communicate it to sellers, and coach them to hit those goals. The role of the front-line manager in sales is really important.
Elizabeth
Achieving transparency also means providing not only the plan documents, but things like compensation calculators that fully explain how they get paid for different performance scenarios. Those help whether you're changing a plan or recruiting new people.
Priya
Definitely, It's very motivating for a seller to use a calculator tool and say, “OK, if I close this next deal for $2 million, I get an additional $75K incentive.” She can see the efforts translate into take-home pay.
Grayson
It’s tempting to think your job as a sales comp administrator is done once you design and roll out a plan and start administering it. But I'm shocked at how few sales reps actually understand the way they get paid and the mechanisms that go into their comp. When you talk to sales reps and ask, “Do you truly understand the different measures you're getting paid on,” do you also see that confusion?
Elizabeth
Absolutely - especially as we bring on additional nuanced measures. Maybe we’re calculating different rates for each individual. Or you might have a threshold for one person and not for the other. If you don’t communicate that clearly, folks will not understand how they get paid.
Often, the comp rules are buried in a Word document that's 15 pages long. Should you expect your sales reps to really read that whole thing and understand exactly what they're eligible for and how they're going to get paid? That’s just not going to happen, right?
Grayson
You both touched on this earlier when we discussed new tools and systems that companies use to identify new metrics. What are you seeing out there? What's new with respect to plan designs in SaaS companies? What are they doing?
Priya
I think the renewed focus on multi-year agreements is an important trend in SaaS sales compensation. You want sellers to lock in longer-term contracts. For instance, a three-year contract is great, but if you could do a four-year agreement, that’s even better. We're seeing that translate to comp plans.
You might pay more comp for longer-term contracts, spurring your reps to sell a four-year deal vs. a shorter term. Conversely, this can also be a stick: If you only sell a one-year deal, the credit is lower and it will face stricter scrutiny with a longer chain of approvals. While this isn’t new, today, it has now become table stakes.
Elizabeth
As companies design plans that use new measures and automated administration, they’re often tempted to complicate matters. They’ll introduce scorecards to track various new metrics – depending on what's strategically important.
Grayson
So if I sell a deal, there’s a scorecard associated with that deal with three or four metrics. Depending on how I measure on each of those metrics, it'll affect my pay. That sounds pretty complex. Is that working?
Elizabeth
Generally, we recommend keeping things as simple as possible – no more than three measures.
Grayson
Three independent measures makes sense - you can wrap your head around it. But if those three measures are interdependent, and are deal-specific, it can get even more complex. Do you see more focus on activity metrics – for instance, how many calls did you make, how many emails did you send, or how many meetings did you hold? Is that increasing as companies track activities of their people who are working from home?
Elizabeth
They’re definitely tracking it, but almost no organization is paying on it. It's a great part of performance management. You can see things in much more detail, but it’s not part of a comp plan’s design.
Grayson
How are comp plans changing with respect to the roles and participation of different players?
Elizabeth
At the top of the funnel, technology is helping companies meet their prospects and customers right where they're looking for information. So we’re seeing roles in marketing, for example, that influence the sale. If they click on something online, go to the website and make an online purchase, they haven't really interacted with a sales rep for that transaction. Since we can really track click rates and understand where these deals are coming from, should certain marketing people be eligible for sales incentive comp? Or sometimes, there’s a long tail of accounts with very low revenue who are primarily managed through programmatic campaigns by the marketing department. Marketing is, essentially, acting as coverage for those accounts.
Once they’re a qualified lead and talk to somebody, there's sales development reps or there's chat folks that meet them on the website who answer questions and develop that lead before passing it to a sales rep who closes the deal. Should some of those participants – like a SDR – also receive sales comp? Even post-sales, it’s increasingly common for the customer success team to proactively drive expansion opportunities. So we’re seeing the customer success organization start to qualify for incentive comp.
Grayson
The SDR thing makes total sense, and I absolutely think marketing should be on some sort of incentive comp plan. There's measurable performance that you could pay on. There's probably a cultural shift that must happen in marketing and customer success.
Priya
Customer success has very much been the hot topic lately. What are we asking them to do? And how should we pay them? It’s hard and expensive to land a new customer. Once you’ve captured that new logo, you want to make sure you sell as much product or solution offerings as possible. And that tends to fall on the shoulders of a customer success team. You want to make sure they have some skin in the game for that role.
Grayson
I imagine for customer success, it's something like 90/10 or 80/20 base pay to variable comp. The people who have a greater influence on the sale, like an account executive, they may have a ratio closer to 50/50. Marketing is a bit more interesting. Traditionally they’ve been paid through annual and quarterly bonuses, but I could see that shifting. What about professional services? Is incentive comp filtering into those worlds as well?
Priya
Professional services is responsible for implementing the software post-sale, not in persuading the customer to buy. So our thinking is that they don’t receive at-risk pay, but they can be eligible for a bonus if you hit the metrics and deliver on time.