Sales Compensation Strategy: Growth Booster or Cost Control?
Design a sales compensation strategy that supports your company’s growth
Last week, as part of my series on growth sales compensation strategy, I discussed designing incentives that encourage more predictable revenue streams by encouraging sales execs to focus equally on large and small deals in their pipeline. This week, we consider the opportunities and perils of compensating a rapidly growing sales force.
For hard-nosed expansion-stage SaaS technology company executives and investors, it is common wisdom that when the company achieves favorable customer acquisition economics (characterized by having a high enough CAC ratio or Magic number) then the company should invest aggressively in sales and marketing to capitalize on its momentum. At that point a dollar invested in sales and marketing pays back more than enough for the company in terms of long term, recurring revenue.
In high growth B2B technology companies, once a company has achieved a certain scale and market dominance, revenue can enter a period of hyper growth, up to 20-30% per quarter, and 100% per year. If the average reps’ quota is not dramatically increased, then that means the sales team has to grow almost as much year over year. Very quickly, the sales and sales support personnel will constitute a large portion of the employee base, and potentially an even higher portion of operating costs.
In order to stay on the aggressive growth curve, the sales manager needs to plan to rapidly add qualified new sales team members, but at the same time he or she also needs to contain and control the growth of sales costs. Plan too conservatively and the company misses an opportunity to invest early in bolstering its sales team and fails to achieve its growth goals. Invest too aggressively and the company’s costs base grows uncontrollably, outstripping the revenue growth and eating into reserve capital or requiring a sooner-than-expected fund raise.
This can be aggravated by a lack of sales cost controls, especially if the sales team is growing rapidly and its compensation structure becomes more complex with multiple sales roles, measures of performance, and incentive payout schedules. Typically, at the early stages, sales compensation can be easily tracked and planned for because there are few sales persons, a simple compensation and incentive structure, and a low enough deals volume to be tracked closely at the management level. This can change within a few quarters of rapid sales force and deal volume growth, however, and typically companies are either not prepared or do not have the resources to track the growing, increasingly complex sales cost structure as closely as before. It can be incredibly difficult to recognize early warning signs or to make a quick adjustment.
Therefore, even with great sales and marketing economics, sales management needs to consider a number of factors in planning out the growth of the sales force:
- Understand the sales learning curve that applies to the company/product market, and where on the curve the company is. This is another key indicator to determine the rate of growth of the sales team (as part of overall go-to-market investment).
- Analyze key growth drivers. Companies should carry out marketing attribution analysis to understand the best sources of leads and the best marketing strategies. They should also forecast the growth of the pipeline due to new investment in marketing. This is important because it ensures that sales and marketing go hand in hand in investing for growth. I have written an earlier post on three marketing performance analyses that can be done to help identify and prioritize these key growth drivers, and also another recent post on doing marketing analysis using internal databases and how these can all be helpful in sales and marketing decision making.
- Build and continuously update a sales capacity model based on the company’s historical sales data and comparable industry benchmarks. The model’s parameters should be constantly adjusted over time with updated sales reps’ productivity, average deal size, conversion rates, average opportunity age, as well as marketing indicators such as cost per leads, average volume of lead per rep, etc. There can be different models for different sales roles: a capacity model for Lead Generation, another one for inside sales, or for field sales reps. Only by incorporating these data points can the management have a realistic projection of the sales revenues and costs associated with the investment in sales team.
- Start to adjust the sales compensation plan so that it matches with the company’s growth and maturity. Not only does this help with rationalizing and controlling sales compensation costs, it will also help get newly hired sales reps on the right track early on, and spare them potentially painful adjustments in the future.
However, as we have learned from the recent economic crisis, companies’ growth trajectories are too often hampered by unforeseeable factors, and even with the best models and analytics there will be a lot of uncertainty around the balance of sales revenue and cost growth. So together with the growth of the team, it is important to grow the management capability by investing in sales management staff with analytical experience, improving sales performance measurement systems, and investing in a sales compensation management system like Callidus or Xactly.
In my upcoming post, I will turn to the topic of how to retain and develop top early sales people in a rapidly growing organization on the cusp of breaking out.
In the mean time, please visit my earlier posts on sales compensation strategy: