Most companies fail to realize that they could be generating an uplift of two to five percent from every sales rep just by adjusting their compensation plan to focus on incentivizing the right behaviors, which—spoiler alert—many companies do not.
In the second half of the conversation between Mike Hoffman, SBI CEO, and Chris Cabrera, founder and board member of Xactly (Episode 14 of SBI’s GTM Value Creation Corner Podcast), they explored whether it is possible to overpay top-performing sales reps, to which they agreed that it is.
According to Chris, it all goes back to what companies are really incentivizing their sales reps to do. By taking one look at a company’s comp plan, it can be easy to tell which behaviors it will motivate in sales reps regardless of whether it was the company’s intention to do so, which could lead to suboptimal deals.
To illustrate his point that most companies don’t incentivize sales reps to pursue longer-term deals and annual price increases, he created an example for comparison: Sales Rep A secures a $100,000 one-year deal while Sales Rep B secures a $100,000 five-year deal with an annual price increase of five percent in the contract.
Most companies, he said, would pay both reps the same compensation even though we can clearly see that the second deal was far more valuable.
“The vast majority of companies focus on ARR and net ARR. But if you’re a business that cares about deal quality, you can see that the second deal is worth way more than the one-year deal,” said Chris.
He recounted how Xactly used to be the same way in its early days, focusing on first-year ARR instead of pursuing multi-year contracts with annual price increases. After the change in mindset, the impact on revenue and sales efficiency was significant and immediate.
“If you can get your reps thinking about five-year deals and a five percent increase per year—caring about them on every deal instead of conceding them—then you’ve already secured a five-percent increase yearly,” he said.
The effect is compounding, too. Not only do companies see the immediate impact on revenue in the next five years, but having customer renewals once every five years instead of annually saves them a lot of time and effort. Reps spend far less time pursuing renewals, and customers have fewer opportunities to bargain for discounts at renewals.
“Having the peace of mind that most of your revenue is already locked down for the year is big,” Mike agreed.
Discussing key points from Chris’ book (The Unicorn Fallacy) on why companies get things wrong from a revenue standpoint, the two agreed on five key takeaways:
- There is an incongruence between management teams and investors regarding what drives real growth versus real value.
- There are too many levers to pull; a new CRO could easily get it wrong without guidance.
- Leaders tend to pull the wrong levers out of familiarity or past experience, not because of a lack of competency.
- Companies tend to be too busy focusing on the short term to look at the next horizon.
- Companies focus on a long-term growth program only after something goes wrong—instead of trying to get it right from the start.
Returning to sales reps and comp plans, Chris added that most leaders tend to overcomplicate things and try to incentivize too many behaviors.
“We should focus on a small number of high-impact areas: length of term in contracts, annual price increases, and how we approach discounting. No matter what industry you’re in, focusing on these three things in your comp plan will move the needle,” he added.
“Sales reps will only do what you incentivized them to do. You know how your reps will behave, so why not take advantage of that and build comp plans that drive behaviors that will solve business problems?”
Episode 14 of the GTM Value Creation Corner Podcast, “The CEO’s Guide to Resilient Revenue Streams – Part #2” is available on-demand. Click here to listen to the podcast.
