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XChangeSolution Provider 2016
The Cloud Compensation Handbook
Joseph DiMisa, Sibson ConsultingPractice Leader of Sales Force Effectiveness
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Joseph DiMisa, CSCP
Senior Vice President
Sales Effectiveness Practice Leader
Sibson Consulting, a Division of Segal
Joseph DiMisa runs the sales effectiveness practice for Sibson Consulting, where his areas of expertise include working with companies to develop and implement direct and indirect compensation plans, sales strategies, and sales effectiveness programs. He has more than 20 years of experience working with telecommunications service providers, computer and communications equipment providers, software, and manufacturing companies.
Author of Best Selling Business Book, “The Fisherman’s Guide to Selling”
Author of “Opening The Best Practices Closet” and “Sales Compensation Made Simple”
Certified WorldatWork C5 Elements of Sales Compensation
Certified WorldatWork C7 Strategic Sales Market Pricing
Presenter
770-403-8006
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Five practices dedicated to improving human capital effectiveness:
o Sales Effectiveness
o Performance and Rewards
o Organization and Talent
o Retirement
o Health
Sibson Consulting
Part of the Segal Group
One of the 10 largest benefits consulting firms in the US
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Benchmarking Information
Compensation forums and roundtable
discussions that deal with key issues in compensation
Sibson Forums and Roundtable Meetings
Surveys conducted across
multiple industries
Sibson Surveys
Various industry compensation surveys
and websites
Third Party Data
Sibson’s own compensation
data base
Proprietary Compensation Database
Networking relationships with clients that share information in order to
receive information(Specific client information always kept confidential)
Our Clients
Where does the information in this presentation come from?
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Cloud Compensation Handbook Snapshot: We created all-encompassing report on sales effectiveness and compensation practices for cloud based companies
The report contained two main sections, which were divided into several subsections:
What are we going to discuss today?
A. Strategy: Cloud Compensation
State of the Cloud
Job Roles
Target Pay Levels
Mix and Upside
Measures and Weights, Mechanics and Links
B. Policies: Cloud Governance
Quota Setting and Allocation
Compensation Cost of Sales (CCOS)
Sales Compensation Eligibility
Compensation Administration
Crediting Policies and Practices
Discounting Policies and Practices
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What Are Cloud Services?
Flexible Consumption Models
Customers can choose how much and when to use a given solution
XaaS (anything as a service)
Software
Platform
Infrastructure
Professional Services
Managed On or Off Premise
Samples Resulting Revenue
Hardware Predictable
Perpetual License
Maintenance Contract
Sku’d/Fixed Fee Service
Committed Fee Paid
Incrementally
Unlimited Use Contract
Multi Year Subscription
Time and Materials
Variable Consumption
Hosted Solutions
Unpredictable
A Model For On-Demand Solutions Without The Purchase of Software and Hardware or Resources
AKA: XaaS, SaaS, Flexible Consumption, Utility Based Model, OPEX, Usage Model, Solution Selling Model
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When products are sold as a service — a cloud-services or recurring-revenue sales model — sales reps are compensated based on the amount of product consumed or used, the amount of bandwidth sold or a unit of time to which the buyer is committed (e.g., a daily, monthly, quarterly or annual contract or commitment)
How Does it Work? The Product-as-a-Service - THE SALE
Consumption/Usage/Bandwidth
Fees are based on actual usage, bandwidth, consumption (e.g., per user, per unit of transaction
Units of Time or Subscription
Fees are based within a unit of time (e.g., monthly)
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Shift of Focus – Why have On-Demand Products grown so fast?
Cutting Costs
2009–2012 Cost cutting was seen as critical to meet revenue goals in a down economy
Today 85% of responding organizations still view cost cutting as a means of increasing margins, BUT…
Old Strategy
New Strategy Building Revenue
Only 20% of organizations feel they can continue achieving their goals through business as usual.
For 80% of organizations, the focus has shifted to new revenue generation opportunities.
Because of growth needs, recurring revenue and new markets
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What is your company planning to do to maximize its revenue growth?
Top Strategies for Growth in 2016
All three of these strategies relate to Cloud Sales
% of Companies Planning on Using These Strategies
Building for Revenue Growth
70% 60%85%
Increase
Productivity
Expanding
Our Product
Offerings
Re-Design Our
Sales
Organization or
Sales Roles
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Changes in Organizations
Sales organizations have not kept pace with the rate of change in the sales force and incentive plans
85% of companies are struggling with new coverage models and compensation demands posed by new recurring revenue models
The typical legacy coverage model does not take into account longer sales cycles, specific product expertise needs, higher concentration of resources needed to close sales, and lower in-year revenue results due to multi-year contracts and discounting
67% of cloud-based service providers state that three times as many resources may receive credit for a deal in this “new normal” than in previous circumstances
Overall, cost of sales for new cloud sales has increased as much as 34% in year one of contract
Current in-year revenue for cloud based products is 45-65% less than legacy based in year compensation (committed in-year revenue vs. uncommitted out-of-year revenue)
Over the life of the deal, incentive compensation is declining; sales reps are selling less enterprise deals
What are the effects on your sales organization?
Margins for cloud deals in the long run may be more strategically important
and more profitable, but the complexity and timeline are larger and longer
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The key principles in developing an on-demand sales compensation framework are agility in scaling to volume and sensitivity to legacy products and services.
Companies typically aim to achieve the following three goals during compensation plan design:
1. Protect base revenue
2. Incent for acquisition revenue and expansion of revenue/usage/consumption
3. Continue to sell core products
Companies that sell on-demand products/services typically use two kinds of revenue in their plans:
1. Billed Revenue: actual revenue billed to a customer over a defined period of time (NBR, TBR, ABR, IBR)
2. Sales/Booked/TCV Revenue: Anticipated revenue that serves as a proxy measurement over the lifetime of a product over a defined period of time
External Insights, On-Demand Compensation Practices
The key is to understand that there is a wide spectrum of quota setting and crediting options when paying on recurring revenue.
To gain success in compensation planning, a firm needs to have a strategy in three key areas:
How it differs from legacy deals? What are the right
targets, credit, and quota retirement?
Financial
What products and customers drive the sales
process?
Products
How are roles and process different in
this new selling model?
Sales Process
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Based on our experience with many clients working to transition from traditional OpEx to CapEx models, companies are struggling with the following:
Ability to align current go-to-market programs and sales channel coverageto new cloud selling needs
Difficulty weighing the greater, strategic long-term revenue that flexible consumption deals provide when compared to legacy deals and find, as a result, that reps prioritize legacy deals over cloud deals due to the greater short-term revenue available
Predicting new flexible consumption solutions at the outset of the plan year that will be strategic for future growth and available during the plan year
Over-complicating the compensation policy and changing the plan mid-cycle with confusing add-on flexible consumption plan mechanics and sporadic concessions from original designs
Providing payments that do not correlate with flexible consumption performance
Common Cloud Compensation Issues
Many companies are starting to address these issues with sales organization and sales compensation realignment. This helps to emphasize long-term revenue and
accommodates the introduction of new solutions throughout the plan year.
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Companies are putting more emphasis on billed revenue (actual revenue that bills), yet they still want to keep some emphasis on sales (total contract or lifetime value). The challenge they face is deciding on the weight to put on each component.
Billed Revenue and Sales/Booked/TCV Revenue Both Reflect Likely Performance Measures for our Framework
Billed Revenue Sales / Booked / TCV Revenue
Pros
Fiscally responsible (requires revenue to bill prior to crediting rep)
Any revenue is considered good revenue and equally valued
Pays on what company actually earns
Aligns senior management and rep
Focuses rep on aggressively acquiring new business
Immediate gratification for sale; may enhance motivation
Clear line of sight
Easy to administer
Cons
May not create enough focus on “growth” elements
No immediate gratification for rep; may diminish motivation
Less ability to drive “hunter” behavior
Requires careful rep auditing
Difficult to administer (timing of sales, hierarchies)
Requires hard or soft threshold due to recurring business
No incentive to retain business
Payments made to reps before all revenue is booked
Requires true-up
May encourage bad sales and/or unwanted orders
May discourage customer care as reps move on
Difficult to align with corporate financial goals
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Job roles typically observed at high-tech organizations who are strategically oriented around cloud and flexible consumption.
Typical jobs we see in the space, and that are included in the following slides, are:
1. Regional Account Manager—Small to Medium Accounts
2. Regional Account Manager—Medium to Large Accounts
3. Strategic Account Manager/Global Account Manager
4. Business Development Representative
5. Subscription Sales Specialist—Existing Accounts
6. Subscription Sales Specialist—New Accounts
7. Product Specialist/Architect
8. Systems/Application Engineer
9. Channel Manager
10. Alliance Manager
NOTE: The focus areas provided are not exhaustive; it is possible that roles may be responsible for more or less based on the needs of individual companies. For purposes of this study, we provided the most common areas of responsibility and focus.
Introduction to Job Roles – Basis for Comparison
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While there are many variations in the specifics of sales job roles, at a high-level, jobs typically align with one of these generic sales roles: Hunter: Generates revenue primarily from acquisition of new customers
Farmer: Generates revenue primarily from retention and penetration sales with existing customers
Hunter/Farmer: Revenue generation is a result of a combination of Hunter and Farmer roles; this role services and sells to existing accounts, while also prospecting and selling to new target customers
Sales Support / Overlay: Provides technical support to field sales reps on an as-needed basis; this role is typically a resource shared by an entire region or territory
Job Definition and Involvement in Sales Process
TYPICAL SALES PROCESS INVOLVEMENT BY ROLE TYPE
Identify Need
for Solution
Determine
Solution
Requirements
Determine
Solution
Sources
Generate
Leads /
Contact Key
Decision
Makers
Qualify
Leads
Market and
Account
Base
Analysis
Evaluate
Solution
Requirements
and Sources
Finalize
Terms and
Conditions
Contract for
Solution
SalesPre-Sales
Implementation
Process
Post-Sale
Ongoing
Support
Post-SalesClose
Day 0 Day 1 Day 2
Hunter Focus
Hunter/Farmer Focus
Farmer Focus
Sales Support / Overlay Focus
Ongoing account maintenance to drive usage and consumption.
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Quota Setting and Allocation
Market Data
Job RoleAverage Primary
Quota Type of Revenue
Regional Account Manager —Small to Medium Accounts
$2 – 3.1M Billed
Regional Account Manager —Medium to Large Accounts
$2.4 – 3.7MSales / Booked / TCV
Revenue
Strategic Account Manager / Global Account Manager
$3 – 10MAnnual Recurring
Billed
Business Development Representative
$5 – 7M Sales / Booked / TCV
Revenue
Subscription Sales Specialist —Existing Accounts
$1.5 – 2.5M Billed
Subscription Sales Specialist —New Accounts
$3 – 6M New Subscription
Product Specialist
$7 – 10M (dedicated)Strategic Product
Sales$10– 30M (pooled)
Systems / Application Engineer $4 – 6MStrategic Product
Sales
Channel Manager $5 – 7MChannel Partner Quota Attainment
Alliance Manager $7 – 15M Billed
Quota levels will vary based on go-to-market and sales strategy as well as the type of primary measure to which a sales rep is assigned. The following is a high-level overview of typical high-tech quotas and primary measures relative to key cloud sales roles.
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The decision to take one approach versus another when introducing cloud offerings into a compensation plan can be complicated; however, there are a few key questions that organizations use to help facilitate the discussion.
Conversations Organizations Have to Help Introduce New Cloud Offerings
YES
1Add-on to the current plan
2Stand-alone unit-based
measure3
Stand-alone revenue-based measure
4Absorb revenue targets into main revenue quota
Is the offering strategic(in preference to current
business models)?
Do we have the ability to forecast and predict quota?
Is there a quota or target the organization needs
to achieve?
Should the offering be a focus for the reps?
QUESTIONS TO ADDRESS
NO NO YES NO YES NO YES
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In looking across the high-tech industry, typical high-tech jobs have mix and upside that align with the ranges below.
Determining Pay Mix and Upside
Blended Roles
Type of Influence
Moderate influence on saleCritical to maintain
relationship
Strong influence on sale
Some relationship management
Very strong influence on sale
Light relationship management
Sales ProcessLong-term sale
Deep customer knowledge
Short- to medium-term sale
Moderate customer knowledge
Short-term sale
Resolves common concerns
Product Type Custom solution-oriented
Standard product / service
Some potential customization
Transaction-based
Pay Mix 80/20 – 70/30 70/30 – 60/40 60/40 – 0/100
Upside 1x 1 – 2x 2 – 4x
Both of these components of compensation are dependent on the desired job behaviors as well as characteristics of the buying and sales processes.
Relationship-Based Sellers
Pure Deal Makers
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The best performance measures are those that align most closely to the business and sales strategies, are measureable, can be tracked, and provide a direct line of sight for the sales rep.
Hierarchy of Performance Measures
Level
Type of
Measure Strength Generic Examples
Top Financial
Very High
Direct link to company’s
financial performance
Total Net Revenue
Gross Profit ($ or Margins)
Operating Profit ($ or Margins)
Net Income ($ or Margins)
Units
Second Strategic
High
Direct link to execution of
strategy
Product Mix
Partner Mix
Contract Length
Partners Participating
Returns and Collections
Third Activity
Moderate
Indirect link to execution of
strategy
Number of Accounts Handled
# of Partners Recruited
Events (Contracts Signed)
Customer Recognized
Milestones
FourthSubjective/
Judgment
Weak
Loose linkage to company
performance / strategy; hardest
to manage / govern
MBOs
Professional Development
When companies make the transition from enterprise / legacy products to more subscription-based products, a discussion around measures becomes critical to business success. This will be addressed further in the Cloud Strategy section.
Performance Measures should meet the following criteria:
1. Controllable: reps are able to impact outcomes
2. Measurable:company can quantify and report out on outcomes
3. Strategic: desired business objectives and customer needs are supported
4. Consistent: reps are treated fairly; comparisons over time are possible
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Here is a more detailed look at measures that are typically found in high-tech, services-based compensation plans:
Incentive Measures and Weights
Profitability Sales VolumeProductivity/ Effectiveness Non-Sales Event Customer Based
FinancialFinancial / Strategic
Strategic ActivityActivity/
Subjective
Gross Profit Dollars
Gross Profit %
Gross Profit Dollar Growth
% of Gross Profit Rate
Sales/Booked/ TCV Revenue
Billed/Subscription/ Recurring Revenue
Recognized Revenue
Items
Units
Contracts
Specifications
Accounts
# New Accounts
Close Rate
Receivables
Product and Service Mix
New Product Launch
Price Management
Discounts
Realization
Average Revenue per Product or Service
Sales Expense
Cost Per Order
Pipeline Management
Sales Referrals
RFP Qualification
CRM Activities
Customer Commitment
Subordinates
Participation (# Achieving Sales Targets)
New Hire Ramp-Up Time
Turnover
Sales Satisfaction
Customer Survey Ratings
# Order Changes
Customer Loyalty
Churn Rate
Customer Satisfaction
Share of Wallet
Retention Sales
Repeat Customers
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Upside Opportunities
Excellence and upside are intended to reward above-expectation performance. The use of these mechanics varies significantly among high-tech companies.
NUMBER OF LEVELS OF ACCELERATION FOR
ABOVE-QUOTA ACHIEVEMENT
31%
38%
8%
23%
One Two Three More than Three
Upside LevelPerformance Expectation
2 : 1 135 – 150%
2.5 : 1 120%
3 : 1 140 – 200%
UPSIDE PAYOUT LEVELS AND CORRESPONDING PERFORMANCE
EXPECTATIONS
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Accelerators in High-Tech Sales Compensation Plans
Values are Illustrative
Discrete Quarterly Bonus
% of Quota Accelerator
0 – 50% 0.5x
51 – 100% 1x
100 – 150% 3x
150%+ 3.5x
Values are Illustrative
Annual / Cumulative / YTD Quota Paid Quarterly
% of YTD Quota Q1 Accelerator
1st Half Year Accelerator (less previously paid
incentive)
Q1, Q2, Q3 Accelerator (less previously paid
incentive)
Annual Accelerator (less previously paid incentive)
0 – 50% .5x .5x .5x .5x
51 – 100% 1.5x 1.5x 1.5x 1.5x
100 – 150%Paid only after annual quota is achieved
3x
150%+ 3.5x
PAY CADENCE PRACTICES
Accelerators are applied when performance is above target and are increased above excellence. These are sample acceleration tables which highlight overall acceleration for the plan as well as application for quarterly payouts.
Note: Pay for performance above quota in discrete periods is accelerated
and paid each period. For periodic (e.g., quarterly) payments made vs. an annual plan,
above quota pay is withheld until the annual quota is achieved.
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Crediting for XaaS Creates Confusion and Complexity
There are a number of crediting options for XaaS:
Multi-EventAt what time is compensation earned?
Bookings, billings, revenue recognition, etc.
1
Multi-ValueDo you credit more or less for recurring,
one time, etc.
2
Multi-YearCrediting beyond a year
3
Multi-RepSelling to, through, with, etc…
4
While On-Demand can affect all types of crediting, our experience has shown it to most significantly impact multi-event and multi-year crediting.
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Multi-Events Crediting Impact: Bookings vs. Billings vs. Cash Collected
Benchmarks
42% of companies paid at time of bookings or (sales contract)
58% at time of revenue recognition
Bookings(revenue at contract
signing)
Billings/Invoice(revenue billed to
customer)
Cash Collected(revenue collected from
customer)
Key Considerations
Hunting vs. farming orientation of sales role; the more
hunter, the more appropriate to weight bookings more
Span of control/influence of sales role on
product/service implementation and bill payment
Revenue realization rate (% of bookings converting to
cash collected)
Pay philosophy in terms of compensation for
salespeople relative to overall corporate performance
Potential Revenue Recognition
TREND: Our experience indicates that market practice includes an even split of bookings vs. billings with some companies using a combination of the two.
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The number of reps credited on a deal depends on a number of factors: the type of credit, the deal value and the nature of distribution.
Number of Reps Credited on Deals
Type of Deal Definition Involvement?Number of Reps
Credited
Sell To Location where the sale is closed Always Yes 1 – 5
Bill To Location where invoice is sent Yes or No + 3 – 6
Sell Through Location of third party which sells through to an end user Yes or No + 3 – 4
Sell WithProduct or service that is not taken as inventory by a Channel partner, but is sold with them to the end-user
Yes or No + 3 – 7
Ship To Location where product is shipped or where service is performed Yes or No + 5 – 7
Install Location where product is installed and/or used Yes or No + 5 – 7
For Each “Yes” Row, add the number from the Number of Reps Credited Total
Baseline Crediting Expectations by Type
This is the initial number of reps typically credited based on the type of deal. First and foremost, there are the number of reps involved
in “sell to” (typically 1 – 5 credited, per below). Then, based on additional touch points in the process, others may also receive credit.
Value of a Deal Multiplier
$0 – 2M 1 – 2x
$2 – 5M 2x
$5 – 10M 2 – 3x
$10 – 15M 3 – 4x
$15M+ 4 – 6x
Multiplier for Deal Size
Once you have determined the number of reps credited, the size of the
deal may warrant a multiple of that initial number. Typically, as the size of
the deal increases, so does the number of people involved in the sale.
Tiered Distribution Multiplier
One-Tier 1x
Two-Tier 2 – 3x
Three-Tier 2 – 3x
Multiplier for Distribution
After accounting for deal type and size, the nature of distribution may
warrant an additional multiplier. If there are multiple tiers of
distribution, then there may be still more people involved in a deal.
The industry average for cloud type of deals includes selling through a partner to a customer with an average value of $3M. The typical
number of reps credited is 23 – 26.
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Typical Crediting Events For On-Demand Sales
a sale is typically recognized by one or more of these events:
Fee Paid/Charged for Fixed Service
New Solution SaleCustomer Milestone
Recognized
Subscription Fee Pre-Paid SaleIncrease or Decrease
in the # of Users
Maintenance Fee Solution Sale New Users Acquired
Hourly Charges for Services
Booked to Billed Ratio Activation
Incremental Growth Over Base Revenue
Profit AchievedCost Savings
Achieved
License Sale Revenue GrowthService Levels
Achieved
Realization Rates% of Business/Book
of BusinessCustomer Satisfaction
Time to Breakeven/Profit
Usage Levels New Logo
Migration to New Solution
Educational Levels/Training of
UsersUser Length/Tenure
Upgraded Solution Consumption of Units # of Business
Lines/Components
Contract Renewal Quality Scores Utilization Rates
Discounts AllowedCertifications / Specialization
Retention rates
One-time Upfront Fee
% Upfront for Total Contract Value/Sale/Booking
Actual Yearly Revenue (Time of Sale)
Billed Revenue After the 1st year
Total Contract Value/Sale/Booking
1st Year Anticipated Revenue
% When Shipped, Contract signed or Cash
Collected
Incremental Account Revenue Growth (Billed)
Monthly Recurring Revenue
Contract Billed Revenue (When Installed)
Deal Size/timing % or Revenue (Sliding Scale)
Key Account Milestones
FIRST:payments are issued according to one of these approaches:
NEXT:
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Measures and WeightsRegional Account Manager—Small to Medium Accounts
BilledRevenue
Timing: Monthly
Level Measured: Individual
Strategic Product Sales
Sales / Booked / TCV Revenue
Average Weighting:
50 – 60% 0 – 20% 30 – 50%
Most Common Measures:
Actual revenue billed/invoiced to a customer over a defined time period (e.g., NBR, TBR, ABR, IBR). Target is set by sales management. Credit is provided for the amount invoiced to a customer. It may be discounted.
The performance of the sales rep relative to the new revenue target set forth by sales management. This is typically only for revenue attributable to strategic products, which should be a clearly defined subset of the full product portfolio (may also include services).
Anticipated revenue (sales/booked/TCV) that serves as a proxy measurement over lifetime of a product over defined period of time. Target is set by sales management. Credit is provided for anticipated value of a sales contract at time it is signed. It may be discounted.
Regional Account Manager—Small to Medium Accounts
Monthly
Cloud Benchmark Market Data Plan Design
Quarterly
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Measures and Weights Business Development Representative
Timing:
Level Measured:
Average Weighting:
Most Common Measures:
Sales / Booked / TCV Revenue
Monthly
Individual
Strategic New Product Sales
50 – 100% 30 – 50%
Anticipated revenue (sales/booked/TCV) that serves as a proxy measurement over lifetime of a product over defined period of time. Target is set by sales management. Credit is provided for anticipated value of a sales contract at time it is signed. It may be discounted.
The performance of the sales rep relative to the new revenue target set forth by sales management. This is typically only for revenue attributable to strategic products, which should be a clearly defined subset of the full product portfolio (may also include services).
Business Development Representative
Cloud Benchmark Market Data Plan Design
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Based on our client experience, we have seen a number of potential crediting scenarios. Here are some of the most prevalent examples:
Crediting Examples Over Five Years
Revenue Credited
Year One Year Two Year Three Year Four Year Five
Bill
ed /
Su
bsc
rip
tio
n R
even
ue
A100% Committed Billed,
upfront100% Committed Billed, as
recurs100% Committed Billed, as
recurs100% Committed Billed, as
recurs100% Committed Billed, as
recurs
B100% Committed Billed,
upfront100% Committed Billed, as
recurs
C
100% Committed Billed, upfront
0 -100% Non-Committed Billed, discounted
upfront
D100% Committed Billed,
upfront for years 1 and 2< 100% Non-Committed
Billed< 100% Non-Committed
Billed
E100% Committed Billed,
upfront
< 100% Non-Committed Billed, as commits and
recurs
< 100% Non-Committed Billed, as commits and
recurs
< 100% Non-Committed Billed, as commits and
recurs
Co
ntr
act
Rev
enu
e
F 100% Committed Contract
G<100% Committed
Contract, discounted
H
100% Committed Contract
0 – 100% Non-Committed Contract
I
<100% Committed Contract, discounted <100% Non-Committed
Contract<100% Non-Committed
Contract<100% Non-Committed Contract
3030
Thank you.
Questions?
Joseph DiMisaSVP, Sales Force EffectivenessSibson Consulting
