Tailoring sales incentives to ensure the right sales focus on the right type of deals

In my previous post on the common challenges of sales force compensation design for expansion stage technology businesses, I highlighted how the lumpy nature of the opportunity sizes can throw off the sales incentives plans by encouraging sales execs to focus on hunting large elephants at the expense of bread and butter deals. That is not necessarily a bad thing — one can say that for a growth business, what really matters is a fast growing, accelerating top line and that huge deals, while typically a pain to win and a pain to service, are essential to sales teams beating their numbers and generating growth investors’ excitement.

But an over-reliance on large deals and a sales culture that emphasizes hunting these elephants can have an insidious effect on the way a company achieves its numbers and ultimately its growth DNA. By optimizing for a large deal-focused strategy, the sales team typically has no time to cultivate a steady flow of small to medium-sized deals that can close faster and require a lot less customization. Having a small number of large deals makes it very hard for management to accurately predict revenue numbers more than a few quarters out, and it also hamstrings efforts by sales managers to establish more systematic sales forecasting, as their numbers will be often thrown off the large variance due to those out-sized opportunities. It is also much harder for junior sales reps to achieve meaningful results if they do not have enough support in winning smaller, easier deals to start with. Yet they are often expected to be able to ramp up to the level of more seasoned large deal hunters.

Having the sales team focus on large deals results in a much more sporadic, impressionistic gauge on the market, because the deals always have specific requirements and structures, preventing the company’s management team to really find its growth sweet spot, which should be a group of repeatable, steadily flowing deals from targeted market segment(s). As OpenView’s founder Scott Maxwell wrote, the key to successful sales is to be at bat often and have high close rates, rather than focusing on the one-off out-of-the-park home run.

How can sales management refine its sales compensation structure to encourage salespeople to balance between hunting for elephants and building a steadier pipeline of standard deals?

From what we have learned from our work with OpenView’s many portfolio companies and from the industries, there seem to be a number of solutions:

  • Specifically reward achievement of shorter-term quotas on both deal amount and number of deals to encourage reps to produce a steadier flow of opportunities rather than putting all of their quarterly or annual efforts into landing a small number of large deals.
  • Go even further: Penalize reps for not hitting shorter term quotas by reducing/witholding their total incentive payment/commission even if they hit quarterly or annual quotas with the larger deals
  • Large deals typically have a large professional services or implementation services component, and they can also be multiple-year commitments. Decoupling the true “high-margin” revenues component from the low margin, less scalable services revenues and rewarding higher commission rates on the former will also encourage reps to be more clear-eyed when evaluating larger deals and dissuade them from wild goose chasing.
  • The sales incentives plan should reward upfront cash payment more generously than future commitment, or it should delay the commission payouts for future commitments to later quarters. That will help align sales people’s focus with the company’s priorities in the expansion stage, which is fast growth with a strong cash flow. This strategy does carry a risk of backfiring, however. It can potentially encourage sales people to close short term, small upfront deals while forgoing opportunities for longer term commitments. Still, the risk of wasting sales focus and effort on chasing long term deals and not winning the low hanging fruit is even more detrimental to the company’s growth, as explained above.

Ultimately, the right solution is to refine the sales compensation structure and to gradually segment out the sales team so you have multiple teams focusing on the different types of opportunities, which all call for different selling strategies and behaviors. It would be much easier to rationalize the different sales teams’ incentive plans then. As I have noted in the previous post, even though most companies do not have the resources to do so at the early expansion stage, it is important to start planting the seed of the future team structure early enough.

Setting up an inside lead generation team that can ultimately evolve into an inside sales team does not have to be a huge investment in time and resources. For example, at OpenView, we have helped multiple portfolio companies build and scale out their lead qualification team in a few quarters with very reasonable investments, and we’ve seen some of these teams effectively transition into very effective inside sales forces over a short period of time. It can start out with just a single team member or two, yet the impact on pipeline generation and the predictability of the revenue is more than immediate.

In my research, I have found a number of ideas on this topic, and I encourage you to check them out as reference:

In my next post, we will move on to sales cost (both salary and incentives) and sales capacity planning for a fast growing sales organization — a far reaching issue that requires a combination of deep analytics and an accurate read of the market to get right.

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