Over the last few years the number one reason why partners have told me they aren’t ready to move their business into managed services and cloud-based offerings has been due to compensation models for sales. So I thought I would do a quick and easy blog on a few basics, and for those of you who would like to talk it through further or at a higher level, just contact me.

There are three factors that play into how a company can set itself up successfully for MRR based compensation plans.

  1. Financials: Does your company have plenty of cash on hand, or are the business financials based heavily on month-to-month transactions?
  2. Existing Sales Culture: Is your existing sales staff susceptible to change, used to service-based transactions, and have longer tenured employees than the industry?
  3. Current sales structure and compensation model: Do you have different levels or categories of sales people and how is their compensation structured today?

I feel that these are essential to evaluate before selecting your model. If your company doesn’t have a lot of cash, upfront models may not be the way to go. If your employees are used to transaction deals, then how will they adjust to staying involved with customers over time? If your turnover is high, how will short-term employees be motivated by residual-based commissions if they never are settled in a position? After the above evaluation you are ready to think about how your sales force should be structured, changed, and compensated successfully.

After evaluating the above three points, you are likely ready to determine which approach(es) may work best for your company. You may pilot a few different ones with your sales staff to see which one works best for your company. It is also important to consider if you will separate sales teams, bring on new staff, or use overlay experts to close the cloud deals, while also giving milestones that keep them focused on their traditional business and this new revenue opportunity. There are generally two models considered when making a decision.

1. Upfront models: Base Salary, Commission Only, or Draw Base Salaries plus an upfront commission for each deal usually based on Annual Contract Value.

  • Positive: Larger upfront commission comparable to what they are used to selling with hardware
  • Negative: Encourages rep to move to next account and not develop relationship
  • Scenario: (Let’s assume same example for both scenarios, Rep sells 50-Seat Hosted Phone Deal with a MRR of $1,250 per month on a 2-year agreement. Company gets paid 18% Residual Commission/$225 per month, no upfront money.)
  • Example: Most in this model would pay 1 or 2 x MRR $1,250/$2,500 to the rep and nothing else. It would take company 6 or 12 months to cover commission, and all remaining months, plus any additions or renewals would be their profit.

2. Residual Model: Base Salary, Commission Only, or Draw Base Salaries plus a monthly residual amount based on the MRR.

  • Positive: Encourages longevity of employee , relationship building , and engagement
  • Negative: Smaller commission amounts can run some reps away used to larger checks
  • Example: Most in this model would pay a percentage of the profit to the rep on a monthly/quarterly basis for the agreement period. Most would pay between 10-30% of their profit to the rep. So each month the rep would make $22.50-$67.50 depending on what percentage you go with. The company would net $157.50-$202.50 per month starting month 1.

There are very strong parts to both models, but, in my opinion, using just one or the other could be dangerous unless all of your sales people are exactly alike, motivated the same, and have the same goals. Is this a reality? Absolutely not! Some will hire separate sales staff for MRR, some will split existing, some will have their existing sell both, and some will have an overlay specialist. All of these are good options and can work.

So what I would encourage you to do is have a balanced approach model incorporating things from both compensation models and adding milestones and kickers to the equation to encourage more renewals, larger deals, more upfront profit, deeper account penetration, and for them to make more money.

So pay them a base salary based on a draw that they must account for before earning anything above that. This keeps motivated reps and weeds out the weak and lazy performers. This also keeps you from overpaying underperformers. Give goals and stretch goals, but don’t limit the commission they can earn. Pay them upfront on deals that bring in upfront commissions, residual for residual commissions, an extra 10% of commission for a renewal or multi-year agreement. There are many ways to successfully roll this out, and most will adapt it a few times before finding the right mix. I hope this helps to get you thinking about how to build out your own model, and please contact me if you would like to talk about solutions or even in more detail about this topic for your company.

This post was written by

Bryan is a Cloud Product Manager with ScanSource Service Group.

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