When it comes to compensation planning, it’s important to balance new logo, renewal strategies, and expansion initiatives. On the surface, this might sound simple. But as businesses try to strike the right chord between catering to existing customer requirements and bringing in a healthy drumbeat of brand new logos, the nuanced intricacies become a bit more obvious.
So, how can you design a compensation plan that motivates the right behaviors and keeps top performers thriving?
Rescale's VP of Operations, Gabe Rothman, uses his experience from PagerDuty and Lookout to maximize Rescale’s revenue and operational efficiency. I sat down with Gabe to discuss exactly how Rescale tackles comp planning.
How Rescale does compensation planning
Incentivizing the behavior you want from your sales team can be an extremely complicated exercise. Rescale’s scenarios were no different—here’s what they faced:
Rescale wanted its sellers to focus their efforts primarily on acquiring new customers, but from a bookings and revenue standpoint, their biggest deals consistently come in the form of expansion within their existing customer base. Without a steady influx of new customers, Rescale’s robust expansion motion would wither on the vine in the future. That led to a few questions:
- How do you prevent salespeople from chasing the big dollar expansion deals at the expense of new customer acquisition?
- How do you accomplish the above without creating an unacceptably high base commission rate on new customer deals?
- How do you accomplish all of the above and end up with a plan that is generous in rewarding your top sellers without annihilating your net margins as a result of inappropriately scaled accelerators and SPIFs?
Rescale, like all SaaS software companies, needs to protect its install base. But consider the task of designing a comp plan to do that while accounting for the following complexities:
- How do you give sufficient weight to the value of the renewal base to ensure that it gets adequate attention while avoiding overcompensating salespeople on business they’ve already won?
- How do you mitigate the risk posed to salespeople who have one or two substantially larger than average renewals such that it doesn’t destroy their hopes of having a successful year should one of those accounts churn, but still make it painful enough to matter?
Ultimately, your focus should be to design a compensation plan that accomplishes 3 fundamental goals:
- It has rules that are simple to understand, follow, and operationalize
- It aligns the most lucrative seller behaviors with the goals of the business
- It protects the company’s financial bottom line.
But how do you balance these considerations? Here’s how Rescale’s Operations team thinks about this challenge:
- Split out the renewal, growth, and new business components of the plan into separate components. Doing so substantially increases the base commission rate of the new business and growth components of the plan.
- Cut the accelerator multiplier in half. Because the base commission rates are so much higher to begin with, the accelerator can be lowered substantially and still be highly lucrative. This protects margins and avoids out-of-control accelerators.
- Be somewhat generous with your New Logo targets. By making them easier to achieve, your AEs will work hard to snatch the low-hanging fruit of new business accelerators. Remember new business is the lifeblood of expansion, so you can afford to pay a little bit more in acquisition cost.
- Make renewal business a small, but significant fixed percentage of their total variable (between 15% and 30%). This forces your salespeople to nurture their existing accounts, but doesn’t kill their year if they have a significant churn. And from the business’ point of view, it dramatically reduces commission payouts on dollars the business has already won.
- Make your new business targets aggregate targets, but assign your renewal and expansion targets at the individual account level. This allows your salespeople to hit growth accelerators on any individual account, even if one of their whale renewals churns. And, if they’re able to grow the rest of their install base, they may be able to offset the hit of losing a big customer.
Best practices for comp plans at consumption-based businesses
If you’re managing a consumption-based business, here are 8 proven tips that Rescale uses to plan:
- Estimate annualized spending. Take into account historical consumption patterns, bookings, and other variables.
- Break down annual goals into quarters. This helps you track and assess the performance of your sales representatives on a quarterly basis and provide them with more frequent feedback and motivation.
- Aggregate this data and use it to set targets and identify growth opportunities. In the past, targets might have been broadly set without distinction between renewals, new logos, and growth. But refining your approach can help incentivize reps better. Start by outlining clear targets for each area – how much you expect a rep to renew, the number of new logos to add, and the expected growth.
- Address issues with previous models. Rescale’s earlier methods included a single large target, often leading to payouts on renewals (i.e. deals closed in previous years). They found that although this model had the advantage of a lower base commission rate due to a larger denominator, it wasn’t the most efficient.
- Implement account-by-account tracking. Rescale’s new comp planning approach involves tracking targets at an account level. This allows sales reps to over-attain on individual accounts. And if a rep brings in more revenue from a particular account than expected, they can earn accelerated commissions on the extra amount.
- Ensure renewal attention. You still need to compensate reps for renewals to maintain their focus on existing accounts, even if the growth potential isn't significant for a particular year. Set a flat renewal rate, such as 20% of the variable component, if a rep renews 100% of their book of business. The rest of their target should comprise new logo acquisition and growth.
- Adjust targets account by account. You might need to pull a lot of data and have conversations with sales leadership to understand the potential of each account. Some might not grow, and targets need to be tweaked accordingly.
- Automate commission calculation. Rescale needed robust backend automation to calculate commissionable amounts. As they went through this process, they found that while a commission tool can handle actual commission calculations, the data that feeds into the tool needs to be generated. That involved several factors like determining how much of a closed deal is renewal or growth, whether the rep has hit the renewal threshold, etc.
Ultimately, Rescale wants to define a renewable amount for each customer and sets this as the target. “We set the target and anything that we close above that amount, we call growth,” Gabe explained. “We do adjust it from account to account, but we're generally looking for certain levels of growth on existing customers.”
By aiming for that goal, Rescale successfully fosters expansion while maintaining a sustainable approach, balancing growth with available resource allocation.
Want to hear more from Gabe? Check out the full interview here.