When your business is scrambling for every dollar - like it might be during an economic downturn - all revenue looks the same. But when you have the opportunity to think and plan your future revenue streams, it quickly becomes clear that not all revenue is created equal. Some revenue is worth more because it is linked to longer-term value and growth. Revenue that’s not linked to longer-term growth may present itself in deals that have an initial value greater than deals representing good revenue, but it needs to be de-emphasized by the company. This can be a painful pivot - especially for salespeople working on commission with plans where incentives and corporate revenue goals are misaligned.
Companies target certain types of revenue that reflect the strategic priority of their business. These priorities generally fall into three categories:
- Product: Companies will prioritize certain product revenue because it will carry a higher margin or be linked to potential up-sell
- Customer: Some customers will be more desirable due to lower payment risk, higher future value, ability to leverage the relationship, or lower cost to serve
- Advantageous Risk: Certain revenue may be attached to attractive contract types where revenue is recurring, committed, or paid up-front
Sales Incentive tools to drive strategic revenue
Whichever revenue model aligns with the company strategy, the sales compensation plan needs to motivate the sales team to pursue and capture the targeted revenue. There are a number of different levers that can be pulled when designing the plan, and these levers will yield different types of sales activity depending on how incentives are linked to the generation of strategic revenue.
When incentives are withheld completely unless the strategic revenue is generated it is referred to as a “hard” lever. When incentives are paid, but there are conditions that must be met to access higher payments, it is referred to as a “medium” lever. Finally, when it is possible for the representative to continue earning without any conditions or penalties if strategic revenue is not generated, it is referred to as a “soft” lever. Here are some examples of the different levers:
- Hard lever – a dedicated measure for strategically important revenue is added to the plan and a certain amount of incentive dollars are attached to it. The representative cannot earn their target pay unless the strategic revenue goal is achieved. This is a “stick.”
- Medium lever – there is a single revenue measure in the plan, but over-quota pay acceleration will not be paid unless the seller generates a certain amount of strategic revenue. The representative can still earn their target pay even if no strategic revenue is generated.
- Soft lever – the seller earns an extra incentive (a kicker) when they sell the right type of revenue. The representative can still earn their target pay even if no strategic revenue is generated. This is a “carrot.”
There are pros and cons with each lever type, but the most effective are generally the hard lever sticks. The lever chosen ultimately depends on the culture of the company, as not all companies wish to penalize their sellers if they are still producing revenue – even the less desirable type. It also depends on the comparative value of strategic to non-strategic revenue. If strategic revenue is marginally more valuable than non-strategic, then the company may choose a soft lever. I recently worked with a sales leader who noted, “the reps are speeding down the highway and I don’t want them to pull over the car just to pick up the slightly better-looking revenue.” However, for a company that needs to attract a high percentage of strategic revenue quickly, then the hard lever may be the best option for rapidly accomplishing this.
Non-Sales Incentive tools to drive strategic revenue
Non-sales incentive tools are often less disruptive to the culture and can match the effectiveness of sales incentive plan levers. For example, SPIFs and contests offer extra compensation outside of the incentive plan on a short-term basis. The advantage to the SPIF or contest is that results can be made public on a frequent basis to drive competition. No one is really going to hold up their W2 to show how well they are doing at driving strategic revenue, but they are more than willing to show off their top placement in a contest.
Also highly effective is linking annual merit increases to the representative’s ability to generate strategic revenue. While a high percentage of sales teams are not eligible for merit increases, those that are will have another avenue for the company to drive strategically advantageous outcomes.
If the company has an effective team of first-line managers then it is possible to leverage them to drive certain revenue types. Managers have the ability to take away accounts or territory and recommend sales credit clawbacks. Their ability to direct selling behavior can be leveraged to drive the sales team towards strategic revenue without the incremental complexity or cost of changes to the sales incentive plans.
Finally, many companies will change their hiring profile to target those salespeople who are more skilled at generating strategic revenue. This is especially effective if certain customers or products that are strategically important have unique selling or buying processes that the current sales team lacks. While this methodology is difficult to scale (how many new salespeople need to be hired in order to achieve strategic revenue targets?) it can be a quick way to get incremental increases in “good” revenue.