In the final blog of OpenSymmetry’s seven-part blog series on effective sales compensation plan design, we’re looking at how to manage all kinds of deals — even the unforeseen deal. To read the entire blog series, start with blog one.
Rewarding significantly large sales is a challenge for any business. They are significant because they are critical to achieving overall company sales targets, but they are also unpredictable. These major deals come in several different forms:
- Those that are linked to defined pursuit targets but take months or years to win
- Smaller opportunities visible in the pipeline that significantly inflate because of a target client’s change of strategy
- Windfalls where the seller is not directly connected, but they happen in the relevant territory or account portfolio
- ‘Bluebirds’ that are on no one’s radar and appear out of a cloudless sky
How do we best manage these situations? In this article, we provide perspective on how to handle both foreseen and unforeseen sales deal circumstances.
FORESEEN CIRCUMSTANCES
Some pipelines are ‘lumpy’. Two or three wins could lead to the achievement of sales targets for the year. A strategic account manager with one or two accounts or a new sales ‘hunter’ focused on significant regional or global businesses might only have three or four opportunities in a year. Some new business roles may have just one pursuit that may take two years to play out. The sellers involved are likely to be among your best, so retaining motivation is critical.
Companies will want a target level of sales based on revenue, net profit, or a combination, and predicated on a number of sales. However, to base payout on achievement against quota carries risks. One sale lost or delayed can have a major impact on seller compensation. It’s therefore much better to pay commission based on deal-by-deal consideration.
Major deals are typically complex involving, for example, a combination of technology, services, and complicated contracting. So, it is important to focus payout calculation on the key elements while managing risks to the business (e.g. if there is a contract break clause, calculate payout based on the deal value up to that break clause). You can determine credit point and phased payout so that all commission is not paid out upon deal signature. Instead, for example, 50% might be paid out upon contract signature and 50% after 6 or 12 months once the real economic value of the deal is clearer. The second 50% can be varied if the value increases or decreases.
What happens if there is a deal team?
A common situation is where the deal pursuit requires a team. One example here is an outsourcing company where the deal includes technology and outsourced services. The pursuit team can include several roles — for example, a commercial lead, technical support roles, a project manager, and other subject matter experts. A commission pool would be created. Typically, the largest portion — 50% — would go to the commercial lead who then determines how the remainder is shared based on contribution to the pursuit effort. Understanding and setting expectations are critical in this scenario. To avoid dispute, each role needs to know what to expect in terms of percentage of the commission pool and for what level of contribution. It is very difficult to always objectively define contribution through mechanisms such as time input. Also, over long pursuits, individuals will join and leave the team. So, there is significant complexity here that makes governance essential.
What happens for multi-year pursuits?
Some pursuits take place over several years. The seller may have a nominal 50:50 pay mix but needs to feed the family. In this case, it is common to have draws against the progress of the pursuit based on expected deal size/value. There will be key milestones — proposal, shortlist, negotiation — where the probability of a successful pursuit increases with each milestone. Commission based on expected deal size/value can be calculated, and a drawdown of, say, 10% of the target commission might be paid for each milestone followed by a true-up once the deal is successfully landed.
What about deals with unpredictable value?
There are new clients where the ultimate size/value of the deal is not clear. The client may only wish to commit a small investment in a new service that they will then expand once it is proven to be successful. The deal may be based on a subscription where value is linked to usage. As a business, you would prefer the new business seller to close the business, hand it over to the account manager, and move on to the next pursuit. Many companies prefer to retain new seller interest for the first 12 months so they can be paid on actual recognized revenue as the account grows. To pay out commission on an eventual total deal size — e.g. $5m TCV over five years when the first-year value is only $50k — is risky. To retain new seller credit for five years of the deal risks diverting them from new business to trying to influence account upsell and might cause conflict with the account manager. There is no absolute right answer here. You can reward the new seller based on the first year or first two years value with a multiplier based on contract length, or keep the new seller engaged if you need to expand service usage across multiple divisions within the same company.
UNFORESEEN CIRCUMSTANCES
The occurrence of windfalls or ‘bluebirds’ varies from sector to sector. One example is a technology business where the range of deal sizes can be wide but more predictable. In this case, it is sensible to have a windfall rule to make it clear that if the deal constitutes more than a certain percentage of the seller’s annual target (50% or 66% are typical), commission will be calculated differently. This can be frustrating for the seller and will need to be matched by a reassessment of quota, particularly if such deal pursuits take up significant time and effort. Alternatively, a soft cap can be used to manage the over-quota achievement. This is a clearer solution for the seller. The seller knows that their quota will be reassessed, and they are clear on how their commission for the windfall/’bluebird’ will be calculated.
True windfalls and ‘bluebirds’ need separate rules. You must have a plan for when a $100k opportunity becomes a $1m opportunity or a $5m opportunity lands in a seller’s territory with only a $2m quota. Clearly, in terms of attribution, it is questionable whether the seller deserves credit. But there are many pursuits where the seller loses out because, for example, the pursuit company CFO won’t be moved on price, or the client sponsor resigns at the wrong moment. The seller will argue it is ‘swings and roundabouts’ (i.e. the seller should benefit from good fortune as they suffer from almost closed deals that fail at the last hurdle). However, it is sensible to have clear rules in place to cover these situations. Many companies leave the windfall clause very vague (e.g. ‘the company services the right to review commission payout for certain deals…’). It is better though to provide clarity.
Conclusion
The conclusion here, as for just about all of sales compensation, is to have and provide clarity on how a variety of situations will be judged and decisions made. Whether the circumstances are foreseen or unforeseen, it is vital to keep your sellers motivated, retain your top sellers, and not lose time or good people because of damaging disputes.
This article is the final installation of a series of guest posts, by OpenSymmetry for the Sales Management Association, on optimizing sales compensation plans for any organization. For a deeper dive into designing high-performance sales compensation plans, join us for our webinar on September 4, 2019.
