Company Challenge
The company is a global provider of technology solutions to banks and other large financial services clients. Although the international sales group operates globally, it only accounts for a small portion of total revenue. The group promotes most of the company’s core products and solutions and has until recently, operated on an autonomous, regional basis. The company is looking to drive more consistency in sales execution and programs—including sales compensation—and to ensure tighter alignment with global strategic goals.
Project Approach
The international sales group engaged Alexander Group to create a global compensation framework to provide greater regional consistency for sales compensation plans. Alexander Group conducted interviews with 24 cross-functional stakeholders to gain an increased understanding of unique sales compensation issues and global strategy. In addition, Alexander Group also conducted a quantitative assessment of current sales compensation plans before facilitating a global design session. The design team, with stakeholders from all global regions, including sales, finance and HR representatives, created a series of guiding parameters and plan principles for the regional sales compensation design process.
Key Findings
Industry Profile
The company uses a direct sales model. Sales are large complex deals with long sales cycles and require extensive implementation support.
Industry Performance Measures
Total contract value (TCV)
Estimated total value of a contract at signing
Annual contract revenue
First year of revenue for a contract
New license/logo
Bonus for selling new software or license
Maintenance revenue
Payment for recurring maintenance streams
Maintenance renewals
Payment for renewing maintenance agreements
Management by Objectives (MBO)
Measured based on activities, funnel progress, completing RFPs, etc.
Professional service/consulting revenue
Revenue provides expert advice/system implementation support
Timing bonus
Incentive for making sales earlier in the year, encouraging earlier revenue recognition
Market Trends/Issues
The market continually expands as banks and financial institutions increase their mobile offerings. The industry is also shifting from selling perpetual licenses and maintenance contracts to a managed services model that provides recurring revenue streams.
Making the shift to SaaS (Software as a Service) from enterprise sales is a difficult financial adjustment, because it shifts revenue from large upfront payments to smaller amounts over an extended period.
Products, Customers, Coverage and List of Jobs
The company sells direct to customers in each international region. In all regions, roles align to either existing customers or new customers. Some unique roles have hybrid responsibility. Depending on the region, some sales representatives are generalists and sell all product lines. In select regions, the company assigns sales representatives to a particular product or group of products.
Jobs
Country Manager
Responsible for named accounts and new business generation within a particular country.
- Revenue for all assigned accounts
- TCV for new sales
- Loss minimization
- TCV for strategic products, services or segment
Account Manager
Responsible for managing existing customers.
- Revenue for all assigned accounts
- TCV for new sales
- Loss minimization
- TCV for strategic products, services or segment
Sales Executive
Responsible for new business generation within assigned territory.
- TCV
- Impact Revenue
- TCV for strategic products, services or segment
- IRA
Project Recommendations & Outcomes
Alexander Group created a global sales compensation framework with parameters for all regional sales compensation plans. The framework allows flexibility to account for regional variation while adhering to global strategy and requirements. Parameters include:
Pay mix levels limited to a 15% range within the same role, e.g., account managers must have a pay mix between 60/40 and 75/25.
Menu of measures—each plan may select up to three measures from a menu of up to five options.
The payout formula specifies an individual commission rate (ICR) for TCV and revenue or a flat/tiered bonus amount for other measures.
Guidelines for modifiers may include up to one modifier to be applied to the primary measure with up to a +/–20% impact.
The company’s existing sales compensation plans previously had the same structure and measures regardless of role. The new global framework differentiates sales compensation plans for each role according to responsibilities.
The existing account manager sales compensation plan had no ties to revenue and measured on TCV. This caused some account managers to focus only on signing new contracts letting existing revenue streams erode. Under the global framework, revenue for all assigned accounts is the new primary measure (weighted at 50% to 80%).
Plans for sales executives (new business focus) must also include an impact revenue component. If sales executives achieve Q1 and/or Q2 TCV goals, the measure is paid. Deals signed earlier in the year enable the company to recognize revenue earlier and this measure will help drive the desired behavior.
Improved Sales Compensation Plan Mechanics
Alexander Group recommended a 70% to 80% threshold (depending on the level of recurring revenue) for the revenue component. Before this engagement, treatment of below-goal performance was inconsistent between regions. Some regions had no downside; others had a 0.5 commission rate multiplier. One region had five rate tiers depending on performance. Alexander Group simplified the number of tiers to three. Under the global framework, all TCV measures must include some downside between 0.5 and 0.8.
Aligned Crediting Policies
Existing crediting policies had significant variation. One region credited 50% at signing and 50% at final payment for license revenues. Another region credited in line with customer revenue streams resulting in monthly calculations and payments stretched out over many years. At the other end of the spectrum, one region credited and paid 100% at signing, exposing the company to significant risk from contract changes and cancellations. Alexander Group and the design team simplified the crediting process to balance the need to reward sales personnel in a timely manner and protect the company against risk. Alexander Group established two crediting scenarios. Large deals (>$10M) are credited 40% at signing, 40% at implementation and 20% at completion. All other deals are credited 50% at signing and 50% at nine months or 50% cash collected, whichever occurs first.
Credit Split Arrangements
Each region also had different credit splitting arrangements for when a sales executive and an account manager both co-sell on an opportunity. In one region, if two representatives were part of the same deal, both representatives received credit for the sale, without having quotas adjusted. This led to high compensation costs. Another region only credited one representative for a sale, even if multiple employees were involved. Alexander Group applied a simple credit split of 70% to the sales executive and 30% to the account executive.
Final Observations
The new global framework will create greater global consistency for annual sales compensation design. The company used the framework to launch its new regional plans. With account managers measured primarily on revenue, the company should see much better retention rates for its revenue streams.
Performance Metrics
Revenue (all accounts)
Defined as all revenue recognized in-year. Includes maintenance revenues. Requires representatives to maintain focus on protecting existing revenue and account management.
New Products TCV
TCV for all contracts signed within the year. Includes multiyear deals. Does not include renewals.
TCV for Strategic Product, Service or Segment
Measures TCV to encourage sales for a specific strategic product, service or segment. Sales also credited to overall TCV quota.
Loss Minimization %
Expressed as the % loss rate on prior-year revenue. Encourages representatives to retain existing revenue base.
Client Retention
Defined as the % of revenue or number of accounts retained.
TCV for All Products
TCV for all contracts signed within the year. Includes multiyear deals.
Impact Revenue
Measure based on revenue. Includes all new in-year revenue to link representatives to business revenue goals.
Impact Revenue Acceleration (IRA)
A flat bonus paid if Q1 and/or Q2 TCV goal achieved. Goal for each quarter is defined as 1/4 of annual TCV. The company will incent early deal signing.
Expected Margin
Either per deal or annual multiplier based on target margin %.
One Time vs. Recurring
Specific target for one time vs. recurring contract TCV.
Region Revenue/NOP ($ amount)
Team-based measure based on total region revenue or net operating profit (NOP) $.
Product Mix
Must achieve all assigned products revenue or TCV goals. Encourages balanced portfolio performance.
Margin
Based on achieving annual margin % targets.
Alexander Group has helped thousands of clients.
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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.
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