We recently received a question from a sales operations leader who reviewed the Sales Compensation Programs and Practices Survey results from SalesGlobe and WorldatWork:
“We are revamping compensation plans for next year. Can you help us answer a burning question? Do we look at booked vs. billed revenue? Finance is pushing for billed. Sales is saying not all factors that impact billed revenue are under Sales’ control.”
At SalesGlobe, we work with companies on this question every day. And both parties are correct! The incentive compensation plan is a communication tool that will drive behaviors. Ideally, I should be able to pick up a plan design from one of your sellers and tell you what that person is being paid to do.
Let’s talk about these metrics and the behaviors they drive.
A bookings metric communicates that you want a rep to sell, and then move on to the next sale.
Bookings reflects a closed deal with a signed-off contract, which can be measured easily within CRM if your CRM has been aligned appropriately with your sales process. However, a bookings quota is extremely high risk. So we will often recommend a billings quota which includes some payment made to the rep once the deal has been booked.
In a typical “hunter” role, a rep who is paid for driving new business sales frequently will have some payment made when the deal is booked, but not 100%. Here, the rep is being given a billings quota, but is being paid some portion made at the time of bookings.
We have found that the key to making this metric work well is understanding your conversion rate of bookings to billings. This provides insight into the risk associated with the bookings across your products and services. A conversion rate is factored by dividing bookings by billings and for the most accurate conversion rate, one year of data across your organization should suffice.
A few points to consider in a bookings scenario:
A billings revenue metric shows that you want to deliver and bill for the product or service, not just for closing the sale. This ensures that the up-front work and due diligence to make sure the deal meets the customer’s expectations — and that the company can deliver what is being offered — are in alignment.
Typically, Finance supports a billings metric because of its predictability. There is a much higher probability that all the revenue you expect from this deal will be realized. It makes it easier to manage your overall cost of sales.
Just like bookings, you still want a clause in place for “bluebirds” or “windfall” deals that are so big that you will want to decrease the level of payout if it’s an unsustainable amount for the business.
Of course, a billings metric can be problematic on deals with long sales cycles — those that take a few months or longer to close – because sales is focused on the deal actually delivering, and not just closing. Again, it depends on the behavior you want to drive.
Paying a portion of the incentive on bookings will motivate a sales rep, regardless of whether the rep is responsible for driving new revenue, penetrating existing account opportunities, or both. You can manage this in several ways. For example, you can create two quotas, one that is a bookings quota, and one that is based on billed revenue. Another way would be to create one quota based on revenue and pay a portion of the incentive based on when the deal is booked, and the balance when it is billed.
Here are other factors to consider:
At SalesGlobe, typically we recommend a portion of the pay be made on bookings and the balance on revenue. There are three advantages to this:
Your next question may be “how much?” Typically, this is based on the factors noted earlier, such as the percentage of deals you actually win. There is always some level of risk with a bookings number, but usually we find 30% works well, and 70% on billings is conservative. Other times we recommend 50/50.
This leads to another question: What happens if the deal bombs out? Do you claw back that payment that you made to the rep at year-end reconciliation, during the next pay cycle, or what?
I don’t like claw backs. Paying a salesperson, then reconciling and pulling back the compensation can create mistrust and hard feelings. Your finance team should be able to figure out what percentage could be paid up front in terms of a bookings number (we’ve seen as low as 10%) with the balance paid on billings. This would be based on how much risk you want to take, and how much you can actually control.
I recommend avoiding claw backs as an across-the-board solution. You can protect yourself with a claw back clause covering the “megadeal” or deals over a certain size. That will minimize the company’s payout, and you can always reserve the right to pay the rep something that you deem would be fair.
Lastly, I highly recommend you read What Your CEO Needs to Know About Sales Compensation by Mark Donnolo. It walks you through the basics of sales compensation — the different drivers and considerations — and it will help with the critical alignment of the selling roles to the plan and your sales strategy.
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