Winning Big: Incentive Strategies for Megadeal Sellers

In today’s complex sales landscape, megadeals (large, multiple-year contracts often exceeding millions of dollars in value) have become increasingly common across industries like technology, pharmaceuticals and professional services. Although these deals can be extremely impactful for organizations, they also pose a unique challenge when it comes to incentivizing focused sellers. How should you compensate them when the big deals may not be fully committed and/or the related revenue occurs over an extended timeframe?

Designing an effective sales compensation plan for megadeal sellers requires balancing several competing forces:

• Incentivizing sellers to pursue these high-stakes opportunities;
• Aligning incentives with seller role and persuasion; and,
• Managing financial risk for the organization.

Bookings versus Revenue

A fundamental question toward compensating megadeals is: Should the seller be paid at the time of booking or over the course of the contract using a “revenue” crediting event?

(Note: This article does not address margin metrics that some organizations may also include to ensure megadeals are profitable.)

Consider these approaches:

• Bookings. Sellers are compensated when a signed contract is booked into the order entry system, which aligns with traditional pay-for-persuasion sales compensation principle. This approach works well with contractually committed deals, when revenue is recognized at the time of booking and for “hunter” roles focused on landing new business.
• Revenue. Sellers are compensated on a revenue crediting event. The event will vary by solution and pricing model, but common ones include shipment, delivery, usage and billings. If the megadeal is not fully committed and the value changes over the contract’s life span, paying on revenue mitigates risks of overpayment due to cancellations, change orders and/or underutilization. This system is particularly effective for sellers involved in driving solution delivery or usage.
• Hybrid bookings and revenue. Adopting a combination of bookings and revenue payments rewards sellers early for their efforts while ensuring payouts align with actual value and delivery milestones over the contract’s duration. There are several possible methods in a hybrid approach, including:
  • Bookings payment with true-ups based on revenue;
  • Bookings payment once a certain amount of revenue is realized;
  • Bookings credit with delayed payment at revenue;
  • Partial payment at booking and partial payment at revenue; and/or,
  • Separate bookings and revenue metrics.

Right Situation, Right Solution

There are two main considerations when determining the right solution for the situation.

1. How Much of the Booking Is Committed Upfront?

The contract structure plays a critical role in determining when to pay incentives. Megadeal contracts vary significantly — some are guaranteed, some are based on customer usage or performance-based milestones, and others have a minimum commitment with additional spend opportunity (overages).

Contemplate the following example contracts:

• High committed contract — for instance, a $20 million, three-year contract with no out clause paid upfront. There is practically no risk that the contract will downsize. In this case, it is reasonable to pay a significant portion, if not all, of the incentive upfront at the time of booking.
• Low committed contract — for instance, a three-year consumption-based contract with no minimum spend commitment and an estimated value of $20 million. There is substantial risk that the organization may not realize all of the $20 million. In this case, all or almost all the incentive should be tied to revenue to align payouts with actual megadeal value and reduce overpayment exposure.
• Partially committed contract — for instance, a three-year contract with $10 million committed and paid upfront and the remaining $10 million estimated to come in over the three years. In this case, you can use a hybrid incentive solution with partial payment upfront based on the committed bookings and the remaining payment tied to revenue as the solution is used.

If you have multiple types of deal structures, consider developing a contract classification system (e.g., Tier 1, 2, 3) based on commitment level and revenue realization risk, and link incentive payout practices to those tiers.

2. Is the Seller a Hunter, Farmer or Hybrid Role?

Compensation strategies should reflect the seller’s role in the customer lifecycle. Some organizations use an initial seller who lands the contract (the “hunter”) and an account manager who nurtures the relationship (the “farmer”). Others use a hybrid role that blends both responsibilities. Here are a few takeaways for sellers in each role:

• Hunters. To align incentives or acquire new business, use a booking or contract signing bonus. Tying too much of a seller’s compensation to ongoing revenue can misalign incentives with their role and reduce focus on closing the next megadeal. If the contract is not committed, you may need to include a true-up or partial payment on revenue.
• Farmers. If the contract is not committed, use revenue to align incentives to driving solution delivery and usage. If the contract is committed, think about bookings for closing committed renewals and expansion deals. Consider using a delivery or usage measure if a contract is committed and the role is responsible for driving delivery and usage.
• Hybrid. Blend and adapt parts of the hunter and farmer solutions based on the level of contract commitment and the role of the seller post-land.

Best Practices for Structuring Megadeal Seller Plans

To design an effective megadeal seller compensation framework, the following practices may prove helpful:

1. Confirm contract details. Collaborate with representatives from finance, legal and revenue operations to understand the degree to which the contract is binding, how revenue is recognized and the risk level of value realization.
2. Clarify the seller role. Determine if the seller is a hunter, farmer or hybrid to inform whether their incentive should be linked more to the initial sale or the ongoing solution delivery and usage. Additionally, clarify whether the seller or another role (e.g., customer success) is responsible for driving delivery and usage.
3. Determine measure and credit rules. Determine these elements based on contract commitment level and seller role (booking, revenue or hybrid). Additionally, consider including a sales process milestone measure, if needed, to reward long sales cycle activities prior to close.
4. Incorporate clawbacks and delayed payments, if needed. Use these options if certain performance conditions aren’t met (e.g., the customer cancels, delays implementation, reduces usage) to align incentives with megadeal value and minimize financial risks.
5. Determine how to set quotas. If you use quotas, align the related methodology to the defined measure and crediting rule. If there is a lack of clarity on when the megadeal will occur, use one of two options:
   • Set the “best guess” quota and use a compensation review board to adjust, if needed.
   • Do not assign megadeal quota to the seller. Instead, assign the megadeal quotas to a separate “house account” and provide a separate payout schedule to the seller when it closes.
6. Build a transparent communication plan. Megadeals often involve customized compensation rules. Clearly communicate the decisions around measurement, crediting rules and payout timing. Ambiguity likely breeds distrust and disengagement.

Building sales compensation solutions for megadeal sellers is a complex topic. There is not a one-size-fits-all solution. Consider leveraging a cross-functional design team to pull together contract knowledge, seller roles/responsibilities and available incentive options to determine the right megadeal sales compensation solution. By structuring fair, behavior-driven incentives and focusing on value realization, you can maximize the potential of megadeals and secure sustainable success.

Editor’s Note: Additional Content

For more information and resources related to this article, see the pages below, which offer quick access to all WorldatWork content on these topics:

• Finance and Budgeting
• Organizational Performance
• Sales Compensation