SellingSherpa

B2B Sales Best Practices

Sales compensation for B2B recurring revenue businesses

  1. Choose on-target earnings (base plus variable) relative to local market benchmarks
    Ex: $184,000

    • The more complex the sale, the higher the OTE required
    • Higher OTE leads to a better talent pool and lower regretted turnover
    • Expect the top 10% of AEs to earn 2x to 3x the target OTE
  2. Choose the target pay mix
    Ex: 60% base / 30% commission / 10% discretionary MBO. Continuing our example, $110K base, $55K target commission, $18K MBO

    • Complex products with long sales cycles and significant team selling tend to have higher base salary percentages
  3. Set quotas working backward from revenue, profitability, or other business (ex: market share) goals.
    Ex: With a 7.5% sales compensation as a percentage of revenue target and $184K OTE, the target quota is $2.44M.

    • A test of reasonableness is that 60-70% of AEs should meet or beat quota. Over-performance should more than outweigh underperformance such that ~100% of the company revenue plan will be achieved. Moreover, at this level, sales turnover should be around the industry average of 18% (10% involuntary and 8% voluntary).
    • Also as a test of reasonableness, the overall average quota is $1.57M (source: CSO Insights, 2015). A higher total book may be reasonable if the majority is likely to renew.
  4. Split quotas into recurring (such as MRR or ARR subscriptions) and non-recurring revenue (such as consulting services) components.
    Ex: 90% recurring and 10% non-recurring which in our example is $2.2M recurring and $240K non-recurring.
  5. Set the commission on non-recurring revenue.
    Ex: 5% for sales up to 100% of non-recurring revenue quota and 2.5% above. This means a target non-recurring revenue commission of $12K. Uncapped.

    • The commission on non-recurring revenue should be lower than the commission on recurring revenue to provide a disincentive on non-recurring revenue since it almost always has a lower lifetime margin.
    • In addition, you should consider a decelerator on high levels of non-recurring revenue attainment to provide an additional disincentive to focusing on non-recurring revenue.
    • Some companies hold back commissions on non-recurring revenue until certain recurring revenue targets are achieved but that is complex and discouraged
  6. Set the commission on recurring revenue
    Ex: Pay 10% on ACV in excess of expected average capped wallet retention (min of prior ACV and renewal ACV). Uncapped.

    • Here is how to compute this:
      • Recall the total ACV quota is $2.44M, of which $2.2M (90%) is recurring revenue.
      • Assuming capped wallet retention is 80%, $1.76M will be renewed in the normal course of business. This is covered by the AE’s base salary (which parenthetically means a 6.3% commission on expected renewals in our example).
      • As a result, AE’s are expected to bring in $440K of ACV in upsells and new logos.
      • Given $184K OTE, 30% variable target commission, and the fact that $12K has already been allocated for non-recurring revenue commission, there is $43K left for recurring revenue commission. That yields a rate of 10% (rounded up from 9.8%) on the target incremental ACV.
    • Consider having multiple accelerators for achieving growth above quota.
    • Unless reps have high or complete control of pricing, do not tie compensation to gross margin. Instead, ensure appropriate margin by limiting the discounts AEs can extend.
    • Consider an accelerator or SPIF on multi-year deals.
  7. Set the performance period
    Ex: Quarterly performance period leads to $550K of ACV and $61K of non-recurring revenue per quarter (Assuming even distribution – see note below)

    • The performance period is the time period over which you measure performance to quota
    • Generally, shorter sales cycles and lower forecast visibility call for shorter performance periods.
    • Note: Revenue is generally not distributed evenly. A more typical quarterly distribution is: 21% / 25% / 24% / 30%
  8. Set the payout frequency
    Ex: Quarterly

    • The payout frequency need not match the performance period but often does.
    • Unless reps are directly responsible for generating invoices and collecting cash (very rare), do not tie payouts to cash collection.
    • Strive to avoid claw-backs by modifying other elements of the plan to spread out collection & cancellation risk (which is usually outside of AE’s control) across the business.
    • Set commission payment frequency based on reps needs for cash flow and based on quota reset frequency. More junior reps usually need higher frequency payouts.

Additional best practices:

  1. Keep the plan as simple as possible and provide real-time visibility into accrued commission
  2. Ensure metrics are easily measured & reported in real-time (ex: sales volume) and not subject to change (ex: pipeline).
  3. Reserve room in your compensation budget for short-term incentives (aka SPIFs – sales performance incentive fund) and for non-cash rewards (ex: annual “President’s Club”). However, be very wary of the negative side effects of SPIFs on customer experience and on other parts of your business.

References:

https://hbr.org/2013/12/new-insight-into-key-sales-metrics/
https://www.worldatwork.org/adimLink?id=61615
https://www.xactlycorp.com/blog/business-services-trends-in-incentive-compensation/

 

Privacy Policy