Once a company’s sales force has been structured to sell cloud services (see Are You Ready for Selling in the “Cloud”? Part I: Restructuring Your Sales Force) in the October 2011 issue of Perspectives), the next step is to create an effective incentive compensation plan. Too often, when a company introduces a new product line or service, there is pressure to “pay what it takes” to get the new offering off the ground. Because cloud services, as with any nascent technology, will evolve and change with some rapidity, it is critical to establish a solid foundation with respect to compensation.

Companies designing a compensation plan for cloud services sales professionals should consider all of the key design components and question how each step will be affected by the cloud services sales model. Figure 1 below identifies the seven steps in Sibson Consulting’s Optimal Sales Compensation process, which can be used to guide compensation plan design. This article discusses each step.

Job Role Validation

While it is always important to understand job roles when designing a sales compensation plan, the roles and responsibilities of cloud services reps demand greater clarity and definition to ensure the company is paying correctly for accountabilities and actions that drive sales. Cloud services reps have different priorities from other reps, and those priorities will affect the incentives.

When the job roles are clearly defined, the incentive plan can drive specific types of behavior and reward the proper results. Understanding the success factors, priorities and relationships of each job will allow the company to align compensation decisions with the strategic intent of the cloud services sales role. Paying a job incorrectly or supporting the wrong behavior will jeopardize client relationships and affiliation.

To understand a cloud services rep’s job role, it is important to examine the focus, success factors, priorities and relationships of the role. As shown in Figure 2 below, companies can use a framework of five filters — segmentation, sales strategy, organization hierarchy, sales process and products — to define the job and, ultimately, design the compensation plan.

Target Pay Levels

Accurately setting pay levels is particularly difficult in the cloud services market. Target pay must be aligned with the job role and the external market, which may be hard to benchmark. The following seven factors come into play:

• Degree of Company Stability This should be considered if cloud services is a new division and carries more risk. Startup businesses usually have to pay more to attract top talent due to the risk implicit in a new venture. The more risk, the more reward is expected. More stable companies, or those with longevity and a proven business case or track record, may have less risk. Stability offers value, which is reflected in the total rewards strategy, allowing the company to consider lower targets.
• Desired Business Results How likely is the organization to meet its business goals for cloud services? Companies entering the market need to have realistic expectations regarding their business case. Companies with tougher performance goals are more likely to pay much more for results. Easily attainable goals make a case for setting target pay at a median level or lower.
• Expected Employee Performance (at Quota) What is the sales rep’s expected performance level at quota (target performance)? As with the previous factor, the tougher the goal, the higher the pay opportunity should be.
• Profitability   If the company is profitable and able to generate significant profit through the sale of cloud services, it probably can (and will) have higher target pay levels.
• Supply of Talent Are talented and experienced reps hard to find? If so, higher target pay levels may be necessary to attract and retain them.
• Mobility of Employees How stable is the current or proposed cloud services sales force? Are they “hired guns” who change jobs often? Or are they stable, loyal and likely to stay with the company for the long term? The answer will significantly affect target positioning.
• Staffing What is the typical workload for this new role? Do reps work in teams? Working in teams spreads accountability, possibly giving each individual less influence over a sale. In such cases, target pay may be set lower. Conversely, in a very lean organization, the workload may be greater, requiring higher targets for greater effort and responsibility.

Companies can use Figure 3 below to help set target pay ranges for the factors discussed above. Responses on the left side of the scale suggest that low-to-median pay positioning may be appropriate; responses on the right may make a case for higher positioning. The factors should be considered in their entirety, with greater weight given to those the company deems most important.

Mix & Upside

Pay mix is defined as either target mix (i.e., what the company expects to pay for performance at quota or target) or actual mix (i.e., what the company actually pays, based on results achieved). In most compensation plans, a job’s actual mix differs from the target mix. The key is to understand that the actual mix will always vary as incentive is earned (or not earned) or base pay changes.

Setting the right target mix for cloud services reps helps balance their target earnings to ensure the reps are properly motivated. Cloud services pay mix is usually more aggressive (i.e., more pay is put at risk) when the sales role is more prominent in the sales process or has more influence over the sales results. For example, a mix with more than 40 percent of the rep’s target total compensation in incentive pay is typically considered more aggressive.

A cloud services sales job needs a target mix that aligns with its role requirements and other jobs.  Factors that influence a rep’s target mix include market share, market size, customer acceptance, buying patterns, sales support, job definition, control over the sale, control over the sales volume and close rate.

Upside pay refers to the amount of additional incentive pay reps can earn for achieving outstanding levels of performance over the target incentive (i.e., above-target performance earns above-target incentive). A job with an aggressive pay mix typically needs a higher upside because the more risk sales reps have, the more reward they expect.

Mix and upside work together and should match desired behaviors and the sales process. When setting target mix and upside for cloud sales roles, it is important to estimate the aggregate earnings distribution of all reps to the incentive plans. To accurately and prudently establish upside, the company needs to project its representative distribution target. This means estimating how many reps will perform below target, at target and above target. This distribution will help the company to cost out the plan and finalize the excellence points (which determine higher pay) and upside payout curves.

Measures & Weights

Because measures are concrete and relatively easy to understand, many companies want to focus on them first when designing a sales compensation plan. In fact, measures should typically be the fourth step in the incentive design process and must be considered in the context of the whole process. Companies need a clear sales strategy, defined job roles and established pay targets, mix and upside before they can consider measures. Starting with the wrong measures can motivate the wrong sales behavior, pay for the wrong results and diminish the sales force’s motivation when the plan needs to be corrected midyear.

Cloud services sales measures include total contract revenue, total billed services revenue, net services revenue, net new services revenue, new accounts, gross margin, price realization and key sales objectives/management by objectives. Many companies selling cloud services struggle to decide which measures to use in their sales compensation plan, how many to include and how much emphasis — or weight — to place on each. It is important to understand the general types of performance measures, when to use them and how to determine the proper share of target incentive for each to ensure the measures and weights drive the desired behavior.

Mechanics, Links & Quotas

Mechanics describes the inner workings of an incentive plan design. A plan’s mechanics create the structure and details for how a compensation plan actually pays out, given a rep’s level of achievement. Depending on the incentive plan structure, mechanics may include payout formulas and/or payout tables that correspond to results against quota or target.

A link refers to how each mechanic or design component operates in parallel with each other, or how they link based on the different levels of performance achieved. A link between components allows a company to ensure that cloud services reps have balanced performance across their various objectives. Typically, when plans have links, reps are required to achieve a certain level of performance across multiple components before they earn higher pay (e.g., excellence pay). For example, earnings may be flat over 100 percent of quota or target on “Measure 1” (i.e., no accelerated pay) until “Measure 2” also reaches 100 percent of target. Once results are more than 100 percent for “Measure 2,” the acceleration kicks in.

Mechanics and links bring the compensation plan into focus and ensure pay elements and measures come together in a way that spurs cloud services reps to accomplish their objectives and earn rewards commensurate with their accomplishments. Mechanics and links can add complexity and, too often, confusion to a plan. The moment sales reps learn about a new plan, they take out their calculators to see how it will affect their bottom line. They study the plan’s mechanics to determine how all components link. This helps them understand in real terms how the plan will affect them and what types of behavior are necessary to achieve the greatest rewards. If the reps do not quickly grasp how the plan works and what they can earn, it may mean the plan is over-engineered — there is either too much going on or the mechanics are too complex.

When designing a cloud services sales incentive plan, it is important leave out unnecessary add-ons that create complexities that garble the message. The sales incentive plan cannot control everything. Some of the management must be left to the managers.

Implement & Communicate

Even the best compensation plans must be “sold” to sales reps and sales management. If reps do not have a clear idea of what they need do and why they need to do it, they may continue past patterns rather than change their behavior to take on the challenges required to meet the new sales objectives. Even worse, if they do not understand how and why they are being paid, they may discredit the new plan from the start.

Evaluate

Evaluation is the critical final step in the optimal incentive design process. A thorough, consistent review can help reveal, avoid or prevent issues before a plan is rolled out or while it is in play.

Overpayments, underpayments, high cost of sales, poor performance distributions and plan “gaming” are all typical compensation issues. While these problems can never be totally avoided or prevented, a tight evaluation process with the right analytics helps confirm what is happening with the plan and whether course corrections are needed before moving forward.

Sales compensation analysis requires three views:

• Overall Financial Picture  How is the plan functioning and what are the costs (i.e., sales force earnings and the company’s return on that investment)?
• Performance Against Overall Objectives  Is the plan driving the desired behaviors and functioning as designed?
• Differentiation of Payouts Based on Performance  Are the top earners the top performers?

Conclusion

While designing a sales compensation plan for selling cloud services may appear daunting to companies just entering this dynamic new market, the above guidelines will help clarify what needs to be done. Companies that take the time to review and adapt their sales models and rewards structures to address the realities and nuances of this new venture have much to gain.

About the author:

Joseph DiMisa is a senior vice president and leader of Sibson Consulting’s Sales Force Effectiveness Practice and author of two books on sales force effectiveness. He can be reached at 770.403.8006 or jdimisa@sibson.com.

Copyright © 2011 by The Segal Group, Inc., the parent of The Segal Company. All rights reserved.