One of the things I get asked frequently by partners is how to compensate sales representatives in the cloud. Generally speaking, it is a fundamentally different approach to what they’ve done in the past and often requires a new type of rep. In many cases, we have seen partners proactively hire cloud-dedicated resources – which can be a good thing – to focus on selling online services, but they are unsure of how to pay them. Below is the approach I often suggest that is born out of some extensive P&L work we’ve done, as well as best practices from some of our most successful partners.
First, let’s settle on what type of partner we’re talking about here. For argument’s sake, let’s assume it’s a Value Added Reseller (VAR) who in the past has focused on selling licenses and followed that up with time and materials billable services. For their new cloud model, they are shifting toward an annuity model and are going to offer monthly managed services in the form of outsourced IT.
When thinking about compensation in the cloud, the first piece to settle on is the fair market salary for the respective geography. In many cases, the reps our top performing partners are hiring are early in their careers, and for that reason, often have a lower base salary. Once you have the base salary, you can do the math fairly easily. The key thing to keep in mind is to keep Year 1 total Direct Sales Cost ratio at 10% or less (~7-8% is ideal). To formulate this, take their total loaded cost (base salary + commission + benefits) and divide that by their total expected revenue contribution (quota). The balance of base-to-commission fluctuates, but in most cases, the partners I work with strive to provide adequate earnings to cover cost of living expenses and a high enough proportion of income tied to performance to keep them hungry for more. For some, this is a 60/40% balance with others being even more aggressive.
In addition to proper direct sales cost alignment, I’d also like to share some insights that partners can apply that will drive certain behaviors among sales reps:
RULE #1 is that this is a volume business! The goal for the partner should be to maximize their own annuity stream. They need to think differently about sales process, close rates, etc. Successful partners realized this early on, and their cloud reps in many cases see three to four times as many deals as their traditional sellers. I often suggest that each rep should be closing one deal per week (give them four weeks break due to holiday and vacation – call it 48 in a year).
Try to avoid paying commissions for Year 2 and beyond. Many of the partners I speak with that have had success building cloud businesses have at some point realized the need to ensure their sales teams remain focused on acquiring customers. One of the ways they’ve done this is by creating two separate sales roles, one focused on acquisition and one for renewal and cross-sell. The acquisition reps are paid only for Year 1 revenue, which keeps them driven and incented to drive new business. As the partners build up a set of customers (~50), I recommend they hire the rep dedicated to the long-term relationship with the customer. The different types of reps I mentioned will each have a different compensation plan and approach.
Pay commissions monthly. I know this can be more of a Payroll/AR challenge, but it’s generally worth it. This was actually done to me in my first sales job, and it worked beautifully. When commissions are paid annually and quarterly, they’re not considered by the rep to be standard of living income. Instead, the money becomes savings. You want commissions to be part of their monthly, regular pay. It’s normal human behavior that they’ll spend it. I remember having a nicer flat (or “apartment” as they say in the US) and car when I was in my early 20s. It changed my behavior and motivated me to sell more. Additionally, this will help normalize cash flow. Rather than experiencing the first month of the quarter as a struggle and the final month as really strong, you’ll realize more even performance.
Pay higher rates on your own annuity stream. The most successful partners in the cloud have built their own annuity streams that sit on top of Office 365 and other Microsoft cloud services. This comes in two forms – managed services (think outsourced IT) and packaged IP (think SharePoint templates, CRMOL workflows, etc.). The margins for these lines of revenue tend to be much higher when compared to other types such as product (resellers) or project services (project based with no recurring revenue opportunity). As a result, I highly recommend paying a higher commission rate for the lines of revenue that provide the greatest return. Doing so motivates the sellers to ensure these lines are attached to the core sales and help drive up profitability.
Hopefully these tips stir some thoughts that help you inspire your sellers to maximize their productivity and enable you to increase overall business performance. As a next step, I’d highly recommend visiting the Cloud SureStep site on MPN and reviewing the content related to building a successful sales engine.
As always, we’re interested in your feedback and general thoughts. Please feel free to share them with us – we may just highlight you as a best practice!
Do you have additional feedback or comments? Let us know on our Facebook page!