Recently we worked with two vendors to update their channel strategy to be more MSP focused. One of the biggest hurdles was to re-align the internal and external compensation systems to support the channel partners. The old adage “you get what you pay for” was certainly true, and without change, the new channel strategy was doomed to failure, as the comp plans still rewarded the behaviours associated with the old program.
When designing a supporting compensation plan for a revised channel strategy, the three big questions are:
- What (who) are you rewarding, and why?
- Is the compensation system aligned to supporting the partner’s success?
- Is the compensation system aligned to the company’s overall strategy?
Incentives come in all shapes and sizes and of course different things motivate different people. In a modern MSP/XaaS/recurring revenue channel model, there are three key sales metrics successful companies are looking to achieve, and all three should have different yet aligned sales compensation metrics.
- Acquire net new customers
- Have those customers then use the product/service as intended
- Have those customers renew and/or expand the breadth of products being consumed
Any reward or incentive system should be designed to control, motivate, influence, and reinforce the desired long-term behaviours that are consistent with the organisations goals. To do this effectively takes time and a lot of careful thought to avoid unintended consequences. Let’s look at how to fix a common compensation mistake we have seen recently.
The Myth of “More Customers Means More Revenue”
If the measure of success in a recurring revenue business model is to grow the monthly billings, then we just need to add more customers, right? Wrong! The correct answer is to add the right customers, that will use the product, then look for additional products/services, and of course renew rather than churn.
In the company we were working with, they were simply rewarding partners with net new total billing against a monthly sales target, but their annual recurring revenue was not growing as fast as it should have been. We found it was easy enough for a partner to sign a new customer up. However, the other two metrics – using the product/service as “sold” to them, and customer retention/expansion – were sadly lacking.
This is where we discovered issues where the old compensation scheme was driving unintended behaviours internally that were having a detrimental effect on partners. Internal vendor BDMs were rewarded for generating leads that could be passed to partners, as they did not direct sell to end users. However, there was no lower limit on the size of the lead and little qualification for a fit to a partner’s existing business. Partners were then supposed to be grateful for getting an unprofitable lead they were expected to close that may not end up wanting to engage or purchase anything else from them. But the BDM made their target!
A better way to reward the BDMs started with better training to better qualify prospects and to better match prospects to suitable partner types, not just the “usual suspects”. Both partners and the BDMs were still rewarded for a new sale, but now there was a 3 month clawback period if they did not consume the service as anticipated. To take this to the next level of alignment, we then suggested having a quarterly or annual commission structure that rewards the BDM and the partner if the customer takes up additional products/services within a 6 or 12 month window. If so, they will receive an additional uplift multiplier of 2 on the additional sales. Same rules of usage and clawback apply for consistency of messaging.
The aim was to create a compensation scheme aligned to the company’s strategy of targeting specific customers with specific needs. If you qualify and sign the right customers in the first place, then customer satisfaction, higher retention rates and of course revenue growth will follow.
5 Step Compensation Alignment Check List
Use the following five step process and check list to help you avoid some of the unintended consequences of poorly designed incentive or reward systems
- Motivation – Begin with the end in mind. What behaviour changes do you want to achieve and are they aligned to your overall goals? What are the types of people you are trying to motivate? If a reward is offered, is it aligned with their values, and is it substantial enough (or are the penalties for not achieving it significant enough) to warrant consideration?
- Effort – Are the required behaviours new, different, or the same as today? And if there is a change of behaviour required, what or how much effort is needed to achieve the reward? (ie. is the link between the effort, the results and the reward going to be worth it?)
- Results – What are the short- and long-term results you are expecting to achieve? What can be done to link the short-term results to the long-term behavioural changes desired?
- Evaluation & Measurement – How, what and why are you going to measure the success of any reward system? In answering these questions, you should consider both intended and unintended changes to behaviours, systems, or processes post implementation for review
- Compensation or Reward – What types or range of compensation and rewards can be offered (eg. cash, non-cash equivalents, prizes, recognition, status etc) and how, when or how frequently will they be distributed?
The key takeaway from all this is that if you update your channel strategy or partner program, then you need to review both the internal and external compensation systems to ensure alignment and therefore rapid take up with the least resistance.
Additionally, having followed this process, put yourself in the shoes of the people or the organisation you are looking to reward – what you would you do to “break” the system and maximise your compensation with the least effort? Someone out there will surely be trying to do exactly that! Watch out for unintended consequences.
Good compensation systems don’t just happen, they are carefully thought through and then designed to align with the specific situation against the desired company goals.