As organizations evolve, so too must sales job roles and sales compensation plans. This is particularly true for successful startup organizations that are poised for accelerated growth. Startup organizations deploy hunter sales reps, among other sales resources, to capture market share wherever possible. At this stage, organizations often reward these hunters by paying a commission rate for every sale.
As organizations mature past the startup stage, focus shifts from acquiring to retaining market share. To support this shift, organizations may deploy one of two sales coverage options: separate hunters and farmers, or a hybrid hunter/farmer role. Each resource will have responsibilities ranging from acquiring new business (hunter) or retaining and growing existing business (farmer) or both (hybrid).
To support continued growth, sales compensation plans must change to align with the evolution of an organization’s sales and business strategy as well as with the responsibilities of the sales roles. Given these changes, communication plays a vital role in the successful transition between stages.
STARTUP SALES ORGANIZATIONS
Startup organizations focus on penetrating the market with a new product or service. At this stage, there is no proven sales strategy to acquire customers. Sellers must be creative in their sales approach to win as many revenue-generating customers as possible. Often, they must work across the entire sales process, including accessing opportunities, persuading customers to make the purchase and fulfi lling the order.
Due to these dynamics, startup sales compensation plans typically have a signifi cant amount of target pay at risk. To earn the target incentive, management often uses commission-only plans to drive salesforce focus on its sole goal: Sell more. In commission-only plans, sellers receive a percentage payout for each sales dollar generated or a flat payment for each unit sold. Calculate commission as:
These plans typically do not include accelerator ramps beyond quota preference because quotas often are too diffi cult to set accurately. An incorrect quota coupled with an above-quota accelerator could produce unexpected, excessive payments.
Thresholds and caps should not be included in startup organizations’ sales compensation plans either. Thresholds enable organizations to avoid paying for recurring sales that require little to no sales effort. Because all sales are new sales in startups, compensation plans should not have thresholds. Caps help organizations avoid excessive payouts due to large, unexpected orders or poor quota setting. However, sellers perceive caps to be demotivating and typically will slow or push orders to the next performance period once they reach the cap. To continue driving sales efforts, don’t incorporate caps into your compensation plans.
As time passes, new customers become existing customers. Eventually, the existing customer population will exceed the new customer population. That’s when it’s time for the startup organization to move into the volume growth stage of its lifecycle.
Organizations at the volume growth stage focus on gaining market share, increasing revenue and expanding their customer base. Sales organizations must concentrate their efforts on retaining existing customers while at the same time finding new customers. As the organization’s strategy and focus evolve, job roles and associated compensation plans are reassessed and redesigned. If the sales organization doesn’t evolve accordingly, the company risks not meeting its sales growth objectives and incurring significant sales compensation expenses.
As mentioned, volume growth sales organizations often favor one of two sales coverage options: separate hunter and farmer roles or the hybrid hunter/farmer role.
An incorrect quota coupled with an above-quota accelerator could produce unexpected, excessive payments.
SEPARATE HUNTER AND FARMER ROLES
Hunters focus on acquiring new business from customers while farmers are responsible for retaining and penetrating existing customers. There must be distinct sales compensation plans for each role.
Under the first option, hunters focus on acquiring new business from new customers while farmers are responsible for retaining and penetrating existing customers. There must be distinct sales compensation plans for each role. The formula design options for these roles include:
- Flat commission: used if quotas cannot be accurately set. For farmer plans, prior-year performance should be taken into account to avoid paying for recurring revenue that requires minimal to no sales effort (i.e., set a threshold in the pay curve above the level of assured recurring revenue). Don’t use thresholds for hunter plans because all sales are new sales.
- Individual commission rate (ICR): used to equalize earning opportunities as territory sizes become more disparate. ICRs allow sales organizations to offer similar target pay for distinct territory quotas, resulting in a different commission rate for each individual seller. Calculate ICRs as:
- Bonus formula tied to quota achievement: used to tie incentive pay to quota attainment. Similar to ICR-based plans, bonus formula rate-based plans equalize earning potential for individuals with unequal territory opportunity. Different from ICR-based plans, bonus formula rate-based plans pay a percentage of target incentive for every percentage of quota attainment. Calculate bonus formula rates as:
Performance measures depend on job roles. Hunter plans typically have one measure — total sales — to drive focus on customer acquisition. Farmer plans may have several measure options: total sales; renewal goal and incremental sales; or renewal revenue and net new business. (See “Applying Different Performance Measures.”)
Organizations can configure the right performance measures to reward sellers’ efforts. Finally, the pay mix (the split between base pay and target incentive as a percentage of target total compensation) differs between the hunter and farmer roles due to the degree of influence each role has in customer persuasion. Hunter roles should have higher pay at risk, while farmer roles should have lower pay at risk.
THE HYBRID HUNTER/ FARMER ROLE
Under this role option, sales management keeps the hunter and farmer roles co-configured in the same job. The sales compensation plan for such hybrid roles always should include at least two separate measures: new business and renewal business. Sales leadership’s determination of the amount of focus that sellers should place on conversion versus retention and penetration activities inform the weights of each measure. The formula and measure options outlined for the separate hunter and farmer roles also are applicable to the hybrid hunter/farmer role.
To ensure focus on both sales growth and customer retention, sales organizations may consider using link designs in the compensation plan. Link designs tie together incentive payouts of two or more performance measures, thereby emphasizing strong performance across all measures. There are three types of link designs:
- Hurdles: require a minimum performance of one measure before a seller can earn any or an accelerated incentive payout for performance on a second measure. For example, a seller will only be eligible for above-target payout rates for renewal business if he or she hits his or her new business sales target.
- Multipliers: use the achievement of one measure to determine a positive (increase) or negative (decrease) effect on another measure’s incentive payout. For example, a seller’s below-target performance for net new business may negatively affect his or her above-target performance for renewal business.
- Matrices: are employed when there is concurrent accountability for two competing objectives. A payout matrix places two measures in a grid with performance against the two measures determining the incentive payout. As performance for both measures improves, the payout matrix provides increased incentive payouts. Matrices have capped payouts, which the salesforce may perceive negatively.
Pay mix for hybrid hunter/farmer roles typically falls between the pure hunter- and farmer-role pay mixes.
To ensure the successful implementation of sales compensation plan designs, sales leadership must effectively communicate the changes to the field.
TRANSITIONING BETWEEN STARTUP AND VOLUME-GROWTH STAGES
To ensure the successful implementation of sales compensation plan designs, sales leadership must effectively communicate the changes to the field. Communication should address why the plans are changing and how sellers can succeed with the new plans. Additionally, place emphasis on how the changes align with and support the organizational strategy and objectives. This shows sellers how their sales efforts will contribute to overall organizational success.
In addition to verbal communication of changes, the sales organization should provide role-specific playbooks that outline plan changes to sales individuals. This collateral provides sales individuals with a reference document to refer to if needed. The role-specific playbook should include topics such as:
- Organizational sales strategy and objectives
- Overview of plan changes and benefits of changes
- Detailed compensation plan components and payout examples
- How to maximize incentive payouts with the new plan
- Frequently asked questions.
Compensation plan changes should be communicated to sales reps at the beginning of the new plan year. If plans are communicated prior to the start of the plan year, they will distract sellers from year-end sales activities. Sales managers also should communicate individual sales goals concurrently with new plans. This provides sales individuals with the necessary tools to earn their incentives and assist the organization in achieving its business objectives. After the new plans are rolled out, ensure the capability to receive feedback from the salesforce and address any outstanding issues or questions.
MANAGE THE EVOLUTION
Depending on your organization’s growth phase, sales strategy and objectives differ. To achieve the sales strategy and sales objectives, roles and sales compensation plans should evolve and align accordingly. Additionally, communication is key when transitioning from one sales compensation plan design to another. Without buy-in from the salesforce, new plans will fail to drive desired behaviors.