Xactly Corp.

02/15/2024 | News release | Archived content

How to Navigate Compensation Changes During Uncertain Times

You have heard it many times before - unprecedented. These are unprecedented times. There has been a huge hit to economic activity, but that was followed by the quickest rebound ever. Now we are in a slowdown as the government fights inflation. The way we work has changed and this has changed our productivity. Many businesses are not able to adapt while others are growing. Even economists cannot agree on what this all means - some say that the real recession is coming soon while others say that we are through the worst of it. I do not intend to dissect all of this. However, when all of these factors are added together there is a commonality with the compensation options that we faced when the tech bubble burst, during the financial crisis, and other times of uncertainty. The choice in compensation plan changes is largely a reflection of how the business anticipates handling the uncertainty, but the choices made now are not different from those made during other times of uncertainty.

In general, companies face two options during times of economic upheaval: weather the storm with the Sales team, or resize. I will not take a position on which option is better, although I will say that resizing is more effective when it is done very early in a lengthy downturn, so the companies doing this now are probably in the minority.

When I look at the companies we worked with during the height of the pandemic, the majority were looking to weather the storm, and this is probably why 100% of the compensation experts advised on how to best hold fast. They advised quota adjustments and changes to the compensation plans that got reps money quicker, and this is definitely a 'friendlier' avenue, but the outcome is usually compensation plans that don't follow best practices and reallocate pay as efficiently from low to high performers.I often make the observation that in an upmarket we are all capitalists, but in a downmarket, we are all communists. As a result of the lower levels of pay reallocation companies will tend to retain the middle and low performers and top performers (who usually have more job options) will leave for greener pastures.

Now, companies are resizing Sales teams. This option is painful, and no one wants to look like Scrooge when times are tough, but it is the go-to option in many industries where it is pretty quick to ramp-such as banking and hospitality. With this option, the compensation plans don't change as much, and it usually ends with the retained reps earning more. I will note that companies will often start with weathering the storm, then reduce the low performers (which they should have done anyway), but there is a hiring freeze so the size of the team falls through natural attrition - but again, it is most likely the top performers that will leave.

Weathering the Storm

Let's start with some of the common changes that can be made to the sales compensation plans. Adjustments to the sales compensation plans reflect a desire to keep pushing reps. This often involves relaxing strict adherence to sales compensation best practices (limiting the reallocation from low to high performers). For example:

  • Remove 'kinks' below quota and increase payouts above quota (try not to reallocate pay from low to high performers).
  • Remove performance minimums - this gets to pay to reps for any sales, even the low-performing ones.
  • Introduce enhanced earnings opportunities for strategic sales (e.g., kickers for term, strategic product or customer kickers, etc.).
  • If splits eat into pay, companies will often offer full credit on a sale for everyone involved.
  • If the economic hit is expected to be pretty short, then companies will often give a guarantee (only one company I worked with during the pandemic did this).
  • Companies will introduce 'effort' measures, such as the number of customer trials or pipeline-building metrics. Note that these are almost always against best practices, but it is a way to get reps compensated for doing something 'constructive'. This is also the type of thing that limits the above quota pay for top performers as money in the plan is being shifted away from sales volume measures. I worked with countless companies that wanted to do this and I advised against it, every time.
  • Try to introduce shorter measurement periods (e.g., move from annual to quarterly) to allow reps to get into above-quota accelerators more often throughout the year and give managers tools to push more periodic performance.
  • A controversial option is to just add measures and pay the reps for 'stuff', although I would advise paying for sales volume-related metrics as this can sometimes be a pure cost to the company without a corresponding rate of return on the incentive spend.

The biggest change that companies made last year was to shift incentive pay toward retention measures and away from growth as they did not expect as much. Once again, this moves money away from those top hunters and makes them more likely to leave. All of these options are intended to funnel payments to the reps who continue to contribute without the usual strings attached to a sales compensation plan. Note that when the economic uncertainty is over, most of this stuff needs to be undone. I make sure to tell clients that it must be clear to the reps that this is not permanent.

There are incremental pay options that are outside of the compensation plan, and I believe that there is less risk here and usually a pretty good ROI for the company.

  • Targeted SPIFs that encourage reps to move into unexplored markets or to achieve stages in a long sales process are popular and have good returns. However, try not to just pay more for sales covered in the core plan. That has a low ROI (it is like believing that the rep won't sell for their current pay, but by offering more they will somehow try harder).
  • Soften club qualifications as it is a buzz kill to have zero participation.
  • Offering pay for things that increase the overall performance of the company - like mentoring, helping marketing, and product development can be good ways to position for future explosive growth.
  • For companies that are investing in new platforms, paying for conversions can position for future growth, as can giving small bonuses to reps that get training.

Note that when the economic uncertainty is over, most of this stuff needs to be undone as well.

The nuclear option in weathering the storm

Companies that attempt to weather the storm may take the extreme measure (or nuclear option) of reducing quotas. This is equivalent to a pay increase for the reps, and it is often difficult to rationalize this during an economic downturn. To put this another way, the Sales team has built an engine that was intended to produce $100M but the market is only able to produce $80M. By simply lowering the quotas you are using the expensive engine that was intended to produce $100M and giving it the same gas to produce only $80M. This is an automatic increase in the compensation cost of sale and is usually considered a severe financial burden on the company - the reps are not hurting from the lower sales and the company is expected to shoulder the full burden of the downturn.

Put another way: if times were unexpectedly good would it be acceptable to increase the quotas?

If this is the avenue that is going to be pursued I usually recommend that if there is a revised forecast give the reps partial relief and hold the compensation cost of sale steady. For example, a company's original forecast was for a 10M spend on 100M in sales (10% CCOS). We now believe that sales will be 80M. If we do not give any quota relief the reps will all earn below quota pay - 8% of 80M for a payout of 6.4M. If the company only reduces everyone's quotas then the compensation spend will equal the same 10M as originally budgeted. The comp cost of sales is now 12.5% - the company has shouldered the full burden of the economic downturn. However, if we give partial quota relief, some reps will earn above quota and some will earn below and we get around an 8M compensation spend. This is the same compensation cost of sales that we targeted before at 10%.

The reps will undoubtedly object to getting lower pay - even if quotas were lowered.

Resizing

It is such a dirty word. When a company resizes the Sales team, they are looking at an expensive sales engine built for a bigger market and adjusting it down. The company analyzes the Sales team and devises a plan to determine the reps that should be retained. For example, does the company keep the reps with pipeline, or the 'cream of the crop' with the highest future potential? Companies will usually try to downsize in waves - the first wave will be the deepest, while the second wave is a refinement based on ongoing business gloom. A third wave is usually only necessary to align with prolonged downturns. Once the Sales team has been identified, the company will try to retain the pipeline by transferring ownership to the highest potential reps. The retained reps will be given higher potential accounts and will often get higher quotas with pay raises to reflect the increase in responsibility and sales expectations (i.e., more money for fewer people).

As a side note: We saw this time and again in remote models selling during the pandemic. Reps were able to dramatically increase their productivity and pay even as Sales team sizes fell.

When a company reduces the size of the Sales team across the board, then compensation plans don't usually change that much-the quotas do. There are just fewer people now. However, if the company chooses to resize by eliminating overlay roles and consolidating sales responsibilities - a move to a generalist, then the compensation plan needs to change. This is done to reflect the change in the job responsibilities and the level of sales risk that the rep is being asked to shoulder. When there is more sales risk as a result of increased responsibilities the plan needs to produce more potential reward for the rep. A company will usually need to eliminate any performance minimums and shared sales credit (these are accompanied by larger quotas - the 'double bubble'). As with any compensation plan, if the rep is being asked to take more sales risk the over-quota pay needs to be steeper. Therefore, the sales pitch to those that remain after a resizing is that the smaller Sales team now has a greater earnings potential. The resizing approach is usually much easier to design a compensation plan for.

When Changes Are Going the 'Good' Way

What happens when a company wants to drive a turnaround as they are now expecting growth? A lot of the changes that need to be made to the compensation plans are just unwinding the changes made during the height of the downturn. During a downturn, companies that chose to weather the storm shifted money in the incentive plan to retain as much business as possible. When it is time to grow again, money should be shifted towards rewarding growth rather than retention.

Another change that companies made during the downturn was to shorten the measurement periods and offer more frequent opportunities to earn over-quota pay. When a company is expecting more growth they extend the measurement period-this allows for more pay redistribution as they can kink the payout curve and helps to protect the company from explosive payouts. During the downturn, companies flattened their curves and paid a flat percent below quota-there was little expectation of pay redistribution from low to high performers. This means that payouts will start low and they will increase as the rep sells more throughout the year. This creates that 'motivational traction' to sell more and also gives marginally higher payouts to those who sell more. During growth, we want to encourage that pay redistribution. It also backloads pay, but this is less of a concern if sales are growing and becoming more frequent.

A huge driver of growth is getting pay to the reps quicker, as close to the sales activity as possible, so they can move on to the next opportunity without the need to shepherd a sale along for an extended time. Moving the payout trigger up (say from paying at go-live to contract signing) does increase the financial risk to the company, but with that risk comes more aggressive sales behavior and a higher volume of sales opportunities being hunted down.

The sales compensation plan needs to reflect the sales strategy, and it is a vital arrow in the quiver to support the company through periods of utter, mind-bending chaos. Depending on the strategy, the plan may need a high number of adjustments-or very few. However, a good plan tactician will have the tricks up their sleeve to support the company.

  • Compensation
  • Cloud/SaaS
  • Incentive Compensation
Author
Jason Rothbaum
,
Senior Principal

Jason has led dozens of engagements with a large spectrum of clients on compensation plan design and implementation-from Fortune 100 to 40 employee startups. He has over 20 years of experience in sales compensation with tenures at the Alexander Group and Deloitte. He also ran Sales Operations teams at Charter Communications, Adecco Staffing, Sonic Healthcare ,and Veridian Energy. Jason holds an MBA from Yale University and an MA in economics from NYU.