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Doing well in what many tech leaders are calling “the year of efficiency” means finding creative ways to do more with less. And as the tech industry faces the toughest fundraising environment in nearly a decade, doing well may mean changing the way you’ve designed your sales organization.
As part of a new research series, we collaborated with sales executives across the ICONIQ Growth portfolio and network to understand how they are changing their go-to-market strategies this year. Rather than focusing on big-ticket deals with custom features and integrations, many tech leaders are shifting their focus to closing smaller-scale deals that can be expanded over time. Instead of spending on getting more top-of-funnel leads, leaders are investing in strong conversion, strong retention, and selling more to existing customers. As priorities and strategies shift, sales leaders are transforming their team’s compensation structure to realign incentives.
We have summarized select findings from our research below. Our Definitive Guide to Sales Compensation includes even more detail—including benchmarks for OTEs, variable mix, quotas, commission rates, and more.
Anchoring incentives to revenue outcomes
The classic compensation structure for a software sales rep is 50% fixed plus 50% variable, which together make up a rep’s “on-target earnings” (OTE). The variable compensation a sales rep takes home depends on their performance against specific goals, and these goals can vary organization by organization.
You can picture these goals as part of a funnel, where the top of the funnel has goals related to spreading awareness about your product and identifying new potential customers, while the bottom of the funnel has goals related to retaining and expanding customers once they sign on.
Variable compensation for marketing employees and sales development representatives is most commonly tied to top-of-funnel goals like number of leads sourced or meetings booked. Account executives and account managers see variable compensation tied to bottom-of-funnel outcomes like revenue and retention [1].
However, in this new environment, revenue leaders are closing the incentive gap between top-of-funnel employees and bottom-of-funnel employees. Variable compensation for marketing employees and SDRs is often now tied to the number of qualified opportunities they source, the pipeline dollars they create, and in some cases, the amount of new revenue they source.
The ultimate goal is revenue, so aligning SDR incentives to pipeline rather than lead volume encourages SDRs to bring in higher quality leads that are more likely to convert.
Rewarding quality over quantity
In addition to closing the gap between the top and bottom of the sales funnel, revenue leaders are incentivizing quality over quantity across their teams.
At the top of the funnel, companies often track the “activities” SDRs are doing to create leads, book meetings, and, ultimately, build pipeline. These activities include outreach of any kind such as the number of emails sent, phone calls made, and voicemails left. While these are undoubtedly important activities to track, sales leaders are starting to focus less on the sheer volume of activities an SDR does per week, and more on identifying which activities are bearing the most fruit—and optimizing those activities.
“We used to give SDRs weekly quotas for calls and emails, and kickers related to their outbound activity. Our volume was great, but our conversions were plummeting, and we lost sight of the importance of quality in the leads we were bringing in. Now our SDR comp plans have kickers tied to how well these leads are converting into pipeline.”
Marketing Leader, Go-to-Market Enablement / Early-Stage
Sales leaders are also thinking of ways to incentivize quality at the bottom of the funnel. While two years ago the common sentiment was to close as many new logos as possible, now we’re seeing a shift towards companies staying hyper-focused on deals within their “strike zone” of ideal customer profile and product fit.
One way sales leaders are incentivizing deal quality is by tying variable compensation to net revenue (gross revenue less revenue lost to churn) rather than gross revenue. This encourages reps to focus on the deals within that “strike zone” where they’re most likely to retain and grow. Tying variable compensation to net revenue can be a good option particularly for companies that have one sales team owning everything from new logo acquisition to renewal and expansion.
Another approach is to implement a multi-goal incentives system where variable compensation remains tied to gross revenue but is also tied to another metric that accounts more for deal quality, such as net dollar retention. Many companies have a multi-metric incentives program and allocate a certain weight to each metric. For example, if a sales rep has $100K variable compensation, 70% of it is tied to gross new revenue, and 30% of it is tied to a net dollar retention goal.
Incentivizing the “expand” more than the “land”
Related, slower new logo velocity combined with weakened expansion bookings is pushing revenue leaders to focus more on their existing customer base. While “best in class” net dollar retention peaked two years ago at 130%+, recent benchmarks range between 105-115%.[3] Revenue leaders are focused not only on baseline retention of existing customers, but also finding ways to upsell and cross-sell to get net retention back up.
“Expansion within accounts is more important than closing large one-off deals. It’s okay to start with a low deal size if you know the customer can grow with you. For example, Snowflake is an organization that did this well. They notoriously closed small deals at huge companies and increased pricing when adoption grew across the organization, leading to tremendous net dollar retention and strong unit economics.”
Revenue Leader, Collaboration and Workflow Software / Late-Stage
To better incentivize customer retention and expansion, we have seen sales leaders increase commission rates on customer expansion revenue or tie a portion of variable compensation to net dollar retention. Some sales leaders are even re-organizing their teams and reallocating roles and responsibilities around this shift:
Rewarding over-performance and managing under-performance
Finally, sales leaders are hyper-focused on sales rep productivity. They are closely tracking individual rep performance and attainment to understand gap to goal and to identify over-performers vs. under-performers.
Classic methods of incentivizing over-performance include implementing accelerated commission rates (e.g., increased commission rates for revenue closed above the allocated quota) and removing caps on commission earnings (i.e., imposing no limit on variable upside).
However, given team-wide quota attainment averages between 60-70%, these types of incentives will only apply to the small percent of sales reps that are hitting and exceeding their quotas. Some sales leaders are trying to implement incentives that will “lift the tide for all boats”.
Usually, sales reps will be paid variable compensation on level of performance to their goal (for example, if new ARR is the goal, the sales rep will receive commissions on any new ARR they close). However, one sales leader we spoke to decided to implement a minimum threshold of quota attainment below which no variable compensation is paid, and above which variable compensation is paid at the standard rate. While we sometimes see this incentive structure at the leadership/executive level, companies are starting to apply this to sales individual contributor compensation as well:
“We set a minimum threshold of quota attainment at which commission payouts kick-in for our sales reps. Below this attainment threshold, reps are not paid for the deals they’re bringing in. It’s really helping us both reward top-performance and manage under-performers.”
Sales Leader, Infrastructure & Security Software / Growth Stage
For example, consider a sales rep who is responsible for new logo acquisition. They have a $100K of variable compensation and a $1M quota for the year, which would give them a 10% commission rate on new logo revenue. If their attainment threshold is 50%, the sales rep would have to close at least $500K of new logo revenue for the year to get paid any variable compensation. If they close exactly $500K, their take home variable would be 10% of $500K. However, if they close any amount less than $500K, they take home no variable compensation for the year.
While relatively rare in the industry, this approach is more common at later-stage companies that have more repeatable sales processes and more robust sales onboarding and enablement functions.
As the focus on increasing efficiency and employee productivity persists through 2023 and beyond, we expect sales leaders to continue adjusting their go-to-market strategy and incentives.
In upcoming chapters of our Go-to-Market series we will share research related to GTM organizational structures, roles and responsibilities, sales enablement, GTM reporting, and more. Sign up for our mailing list here for additional insights and upcoming research.
Published:
June 28, 2023
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