Case Study

Simplifying Sales Comp Plans

Introduction

The company is in the content delivery network (CDN), edge platform and internet security markets. Alexander Group’s engagement with the company focused on the web division sales team. The company’s portfolio included a global CDN, cybersecurity, cloud services, web security and internet security services. These products enable businesses to protect their websites and data centers and give users secure online experiences from any device, anywhere.

The company attempted to implement a compensation structure that management rejected late in last year’s planning cycle. The late stage changes created significant rework for the compensation and operations teams, delayed the launch of the compensation program, and ultimately impinged on the ability of management to communicate the compensation program to field incumbents effectively. The metric created, lookback GMRR (LB-GMRR) (the year-to-date net impact of monthly recurring revenue (MRR)), which is a non-industry standard measure and created payout confusion in both plan administration and commercial resources. Also, existing compensation plans did not effectively align organizational growth objectives with resultant sales behaviors. The company sought to partner with Alexander Group to develop a new sales compensation program, which will align with its go-to-market sales strategy and organizational structure.

Project Approach

Alexander Group advised the company to begin with a clear understanding of revenue strategies, job role design/expectations, and overall compensation philosophy. Applying Alexander Group’s proven design framework and process ensures buy-in from key stakeholders while building best-in-class plans. Alexander Group suggested a project to assess plans vis-à-vis the strategy/roles, philosophies/principles, and market practices, confirm future sales strategy, job roles, and structure and develop new sales compensation plans and select the right measures by job to enable rapid configuration of the administration environment.

The project objectives and deliverables included conducting a strategy, job role and pay-for-performance philosophy confirmation, assessing the current plan and recommending preliminary measures, creating simple, but effective sales compensation plans that align with the company’s future strategy and go-to-market model, and developing plans that drive desired sales behaviors and pay-for-performance culture.

Key Findings

Industry Profile

The company resides within the internet cloud computing industry. Cloud computing consists of three primary services:

Software as a Service (SaaS)

Infrastructure as a Service (IaaS)

Platform as a Service (PaaS)

The market for the company’s solutions is intensely competitive and characterized by rapidly changing technology, evolving industry standards, and frequent new product and service innovations. The company expects competition for its offerings to increase both from existing competitors and new market entrants. It competes primarily based on the performance and reliability of its solutions, return on investment (ROI) and cost of savings, reduced infrastructure complexity, sophistication and functionality of their offerings, scalability, security, ease of implementation, and use of service, customer support and price. The company competes with firms offering products and services that address internet performance problems, including those that provide internet content delivery and hosting services, security solutions, technologies used by carriers to improve the efficiency of their systems and streaming content delivery services.

Along with the competition, some challenges and risks have the potential to disrupt progress in this industry, compromise online experiences and destroy value that took decades to build. Security threats are growing more sinister and advanced. Enterprise applications are moving from behind the firewall to the cloud. At the same time, employees increasingly demand remote access from a variety of devices, which the company believes makes securing access harder to achieve with just traditional perimeter defenses. More consumers are “cutting the cord” and consuming entertainment over the internet rather than through traditional cable, and they are increasingly using mobile devices to view content and shop. Web pages are also vastly more complex than ever before with advertisements, videos, graphics and other third-party content, causing speed and reliability to suffer.

Products, Customers, Coverage and List of Jobs

The company offers online solutions for the security, delivery and acceleration of websites and applications. The company provides services/software in the following areas:

Cloud security solutions

Designed to defend websites, applications and data centers against a multitude of cyberattacks

Enterprise security solutions

Designed to help customers move from a legacy perimeter-based approach to security to a Zero Trust security model

Web and performance solutions

Enables dynamic websites and applications to have instant response times, no matter where the user is, what device or browser they are using, or how they are connected to the internet

Media delivery solutions

Designed to enable enterprises to execute their digital media distribution strategies, not only by providing solutions to address their volume and global reach requirements but also improving the end-user experience

Carrier solutions

Designed to help customers operate a costefficient network that capitalizes on traffic growth and new subscriber services by reducing the complexity of building a CDN and interconnecting access providers

Services and support solutions

Designed to assist customers with integrating, configuring, optimizing and managing core offerings

Go-to-Market Strategy

The company markets and sells its solutions globally through its direct sales and services organization and many channel partners. In addition to entering agreements with resellers, the company has several other types of sales and marketing focused alliances with entities, such as system integrators, application service providers, referral partners and sales agents. The company’s sales, service and marketing professionals are located across the Americas, EMEA and Asia.

Jobs

Account Executive (AE)

Responsible for the strategic objective of maximizing revenue generation within their assigned territory through new customer acquisition that will help them become more successful and profitable online.

Revenue
Lookback GMRR

Account Manager (AM)

Responsible for the strategic objective of increasing revenue generation by selling into the white space within their assigned territory through named existing accounts to enable their customers to become more successful and profitable online.

Revenue
Lookback GMRR

Partner AE

Develops the region’s indirect revenue by enabling and recruiting the right channels and alliances.

Channel revenue
Lookback GMRR

Solution Engineer

Experienced sales engineering professionals, adept at defining solutions that meet the business and technical requirements of existing and prospective customers.

Revenue
Lookback GMRR

Product Specialist

Quota carrying sales professional with in-depth industry knowledge. The primary goal of the product sales specialist is to partner with the direct sales force to increase their solution pipeline and overachieve targets in a defined territory.

(Product) Revenue
(Product) GMRR

Recommendations & Outcomes

Alexander Group’s assessment of the Company’s sales compensation plan design revealed several areas of improvement.

The first area of improvement focused on the complexity of the LB-GMRR metric. The Company attempted to implement a compensation structure that management rejected late in last year’s planning cycle. The metric created during this chaos, LB-GMRR, is a non-industry standard measure and has created some issues in both plan administration and in commercial resources understanding how the Company pays them. The LB-GMRR measure rewards for the “G” (growth) but does not account for other realities of managing accounts in the hunter/farmer hybrid model. The LB-GMRR quotas also directed focus away from protecting traffic revenue—both opportunities may be available for a given account.

The second area of improvement, similar to the first, focused on the non-traffic GMRR (NT-GMRR) metric. This metric was taking the focus off from preserving traffic GMRR. NT-GMRR puts traffic revenue at risk without a control mechanism to limit write-downs of traffic with backfills of new solutions. The rigidness of either being on LB-GMRR or NT-GMRR assumes that account opportunity is binary; interview feedback suggested that little difference existed in rep behavior in those with different measures. Split plan types were also adding additional challenges when measuring managers who had reps on both plans.

Due to both these complicated measures, Alexander Group recommended the Company prioritize controlling for downgrades in existing accounts and to pay for productive revenue “G” (growth). Alexander Group designed a comp plan that focused around removing this complicated, non-industry standard measure, rewarding for maximizing renewals, and retaining as much price as possible on challenging renewals and balancing retaining at-risk revenue with driving net-new business. Alexander Group and the Company agreed to pay on TCV and revenue for a few reasons. The first was to balance what it could control (booking new contracts and higher commits) but not at the expense of revenue (if measures adequately weighted). The second was that it would pay for the effort required on renewals as it triggered a new contract.

The third area of improvement focused on payout accuracy and transparency. The lookback nature of the plans created a moving baseline that limited reps’ ability to quickly calculate anticipated payouts. The nature of the plan complicated an already complex contract landscape for the compensation and finance teams. Interview feedback revealed inaccurate incentive payments and incorrect account assignments. Due to this, Alexander Group recommended that to manage the sales comp program performance and pay effectively, the Company must have the capabilities to track, measure and pay without as much manual involvement. Alexander Group’s shift from this complicated lookback metric to account contract value (ACV) and revenue would alleviate a lot of the manual processes and remove much tension on the tracking/payout processes.

The fourth area of improvement focused on performance distribution. There were stark differences in performance distributions between the LB-GMRR and the revenue measures. These differences indicated to Alexander Group an issue with goal setting, performance, or both. With the 70% weighting on LB-GMRR, this performance discrepancy could lead to more windfall payouts or turnover (as a result of pay below target). Alexander Group also found that AE observed year-to-date leverage (upside) for top performers was at or below 2x; expected leverage should be 2.5x to 3x. Due to this, and in line with the previous Alexander Group recommendations, the removal of the LB–GMRR and NT-GMRR measures alleviated the performance distributions discrepancies. Alexander Group also revamped the AE leverage points to be more in line with industry center practice.

In addition to these four primary areas of improvement, when Alexander Group conducted a “stoplight” (red, green, yellow) analysis of the entire compensation plan by component, Alexander Group identified pay mixes as an additional area of improvement (along with the aforementioned leverage, mechanics and quotas/targets plan components). Pay mixes ranged from 50/50 to 70/30, and while most were in line with the benchmark, Alexander Group worked with the Company to align all roles in scope to benchmarked pay mixes.

Performance Metrics

Revenue Recognition

Revenue recognition for a sales transaction is achieved when the Company recognizes revenue from that transaction in its quarterly Securities and Exchange Commission (SEC) filings on forms 10Q and 10k.

Revenue-Based Incentive

For incentive calculations, revenue is the monthly revenue that the Company recognizes in its quarterly SEC reports. Revenue may include accruals, adjustments, credits or other financial transactions. Revenue-based incentives may be earned by the participant who is actively servicing the account according to the earned incentive definition above and is typically considered earned at the time of payment unless revenue is restated before finally being recognized.

Account/Product Monthly Recurring Revenue (GMRR)

The GMRR is calculated as the net impact of MRR increases and decreases in account or products on any given sales transaction by account. GMRR incentive is determined using year-to-date performance against annual quotas and calculated as a % of annual on-target variable (OTV). Plan participants are eligible to receive an accelerated commission rate when their annual attainment exceeds 100%.

Total Customer Contract Value (TCCV)

Incentives for carrier accounts with TCCV component will be calculated based on monthly recurring revenue multiplied by the contract term (up to 24 months) plus any related non-recurring revenue (NRR). Incentives are calculated the same as account/product GMRR and paid quarterly, two months in arrears.

Management by Objectives (MBO)

For those with an MBO plan component, they are eligible for payouts based on specific goals agreed upon by them and their managers. The MBO achievement is calculated and paid either quarterly or annually. MBO payments are capped at 120% for quantitative measures, and 100% for subjective measures.

ACV/TCV

ACV = Total Contract Value/Contract Period in Years.

TCV/ACV measures the contract over a duration of time.

Gives credit for renewals, even downgrades, if TCV was added on to the original deal.

Annual Recurring Revenue (ARR)

ARR = Monthly Recurring Revenue x 12.

ARR measures at a point in time and is impacted by revenue fluctuations including bursting.

Only gives credit for net positive change to ARR; and does not recognize renewal activity absent of G.

Alexander Group has helped thousands of clients.

Our expert leaders assess, align, design and implement powerful sale compensation programs. Alexander Group has helped organizations realize the full benefits of effective sales compensation programs to attract, retain and reward best-in-class sales talent to profitably grow the business.

We can help with all elements of your sales compensation program.

About Alexander Group

Alexander Group understands your revenue growth challenges. Since 1985, we’ve served more than 3,000 companies across the globe. This experience gives us not only a highly sophisticated set of best practices to grow revenue—we also have a rich repository of unique industry data that informs all our recommendations. Aligning product, marketing, operations and finance efforts behind a successful sales organization takes insight and hard work. We help the world’s leading organizations build the right revenue vision, transform their organizations and deliver results.