Should All SaaS Leaders (Not Just Sales) Have Variable Comp?

Is the secret key to 100% year-over-year growth making sure every single leader in your company, no matter what department, has some form of variable comp?

Sure, commissions, quotas, and variable compensation plans are the norm for most sales teams, but if those motivational tools are so effective, why aren’t we using them to drive performance across our entire organizations?

That’s the question SaaS expert Jason Lemkin posed during a recent OpenView webinar on How to Build a Winning SaaS Sales Team.

“I believe that everyone who has a direct influence on revenue should have variable comp in some amount — everyone.” — Jason Lemkin, Managing Director at Storm Ventures and co-founder of EchoSign

The reason: There’s nothing quite like having money on the line, not only to incentivize people, but to help them really materialize the connection between their individual performance, their goals, and the company’s success.

“We hit the ’15 plan together, you get a pat on the back, your equity is worth more, that’s great,” Lemkin says. “But if you get another $20k — just watch how people change. Maybe it doesn’t change the life of some of your senior hires. But if the reward is $0 — but appreciation in equity — you just won’t get the same alignment to your ’15 revenue plan.”

As an example, Lemkin pointed to a recent board meeting in which he and other members of a successful SaaS company’s board decided to switch the VP Product to a variable plan. As a result, she immediately changed the entire product roadmap for 2015.

“Her metric wasn’t monthly quota. Her metric was hitting the plan for 2015, and the entire roadmap changed,” said Lemkin. “Now obviously, we don’t want the VP of Product sacrificing the 2016 roadmap for the 2015, but it just had a profound impact on her thinking.” And a renewed focus on hitting the plan.

For Lemkin, that kind of profound impact on thinking and focus is just too effective and too important to be confined to the sales team.

“Having a VP Product with variable comp might not be intuitive to everyone,” Lemkin admits, “but how could you not have Customer Success Managers have a quota? The one I’m shocked that people don’t do is that they hire a VP Marketing without variable comp. You really want your VP Marketing, whose job is to create leads and make sales better to not have his or her compensation tied to revenue produced off that? That’s insane.”

Counterpoint

At least one prominent SaaS marketing leader disagrees. In a post “CMO Warning: Don’t Tie Marketing Incentive Compensation to a Metric” HubSpot CMO Mike Volpe argues that linking marketing comp to goals like number of leads generated, amount of marketing-influenced pipeline created, or number a sales-accepted leads created is a big mistake.

Why? While he does believe compensation should be performance-related, he doesn’t believe tying it to specific metrics drives the right kinds of marketing behaviors.

“Under pressure to meet their goals — and using the motivation you’ve set up to make them focus 100% on one specific metric — your marketing team will scramble to work only on that specific metric,” Volpe explains. “If it’s leads, you’ll get a lot more leads, but of lower quality. If it’s pipeline, same thing. Your team will take as many shortcuts as possible to just drive the one metric you set up, and they’ll ignore everything else.”

Volpe also cautions against setting the wrong kind of quota that takes the focus off of long-term goals.

“There is a disincentive for them to work on things today that will not pay off for three or more months down the road, when the reality is that a lot of marketing takes months to influence the results of the company.” — Mike Volpe, CMO at HubSpot

But if variable comp isn’t the answer, what is?

“As an alternative to variable compensation, I’d suggest offering your employees some combination ofa) stock options or profit sharing, and b) raises and promotions and/or bonuses tied to overall performance (evaluated quantitatively and qualitatively by the manager),” Volpe offers.

What Variable Comp in Other Roles Actually Looks Like

If you do want to look into offering variable comp plans for leaders in other roles — VP Product, VP Marketing, VP Customer Success, VP/Director of Engineering — Lemkin provides basic examples of what each could look like in his blog post “Your Variable Comp Plans for ’15: You Probably Need More of Them.”

As a basic example during the webinar, he provided the following breakdown:

“I like to do a plan that’s 80/20/20, or some variant. You figure out what their salary should be. Let’s say it’s $150K. And now instead of their salary being $150K, it’s not anymore. It’s $120K plus $30K if we hit the plan for next year, plus at least another $30K if we hit the stretch plan.”

With that, Lemkin shared a couple of caveats:

• You have to be careful to set the goals right: The base plan can’t be insane. It has to be something like a quota, that you feel there’s at least a 50% chance of hitting.
• You may have to readjust as you grow: Ratios can change, and once you hit roughly 100 employees you may have to step back and reexamine things, but until then Lemkin strongly encourages everyone, especially at the senior level, to have variable comp tied to results.

Of course, there’s also the matter of considering how employees and candidates not used to having a variable comp plan will react. But if they balk at having a portion of their compensation tied to their performance and results, that may actually be a warning sign, especially if you make the reward for hitting goals and over-performing significant.

“You can’t ask the VP Product to take a salary cut,” Lemkin suggests, “but what you do say is that we have a 50% chance of hitting this plan, and if you exceed it you get an extra 15% to 20% bonus. That has a profound effect on every employee, on how everyone views the company.”

What Do You Think?