Will the insurance-agent model, pay-for-the-life-of-the-contract, or pay-only-the-first-year model win, over time, when it comes to incentivizing your sales teams around recurring revenue business?
Over the last three years, we have tracked solution providers as they changed the mix of on-premises resale business into the data-center and recurring-revenue offerings, both managed and cloud services. Next to staffing, sales representative compensation is one of the most pivotal issues in this business transformation. This is a topic of interest not only for the sales representatives but also for company management.
At a recent partner conference, the discussion turned to sales compensation. In response to my inquiry, partners volunteered three different models for treatment of sales compensation. The insurance-agent model was first mentioned in the treatment of compensation for recurring revenue services. In this model, sales reps are paid not only for the first year of the recurring revenue offering, but also for all subsequent years of the service sold, for the life of the contract. The objective is to maintain and manage the customer relationship, as well as the renewal, for the life of the customer relationship.
In the second model, the sales rep is paid for the first year of the recurring revenue contract. The subsequent year, commissions or service margins go to the "house" or are recognized at the solution provider company level, rather than the rep level. The objective is to avoid building a book of recurring revenue business that might foster dependence on the recurring book of business each year rather than on sales of new and expanded solutions to customers. The concern would be similar to that which arose when solution providers or sales reps learned to depend on recurring revenues coming from maintenance renewals, taking away from the emphasis on new technology sales.
The third model increased first-year commissions, effectively incorporating a sales bonus into the first-year commission payment. Subsequent-year commissions are paid to the sales rep who sold the deal, at the actual, rather than inflated, rate for the balance of the life of the contract. The objective is to add an incentive to sell a lower total-cost-of-ownership solution to the customer, and to add that incentive up front.
In 2012, there is not yet an agreed-to industry standard for managed and cloud services recurring revenue treatment from a sales compensation perspective. Both vendors and solution providers are dealing with this topic, each solving the question in a way that works best with their current company culture.
Service provider vendors, IT and carriers alike, are watching solution provider uptake of recurring services. As the service provider vendors refine the value propositions they make to you, they are watching your response to up-front or bonus-driven compensation.
In a 2012 IPED study specific to carrier services adoption by solution providers, solution providers indicate up-front commissions as a motivating factor for sales rep adoption of voice and data network services sales. I see one carrier service provider and a couple of IT service provider vendors paying up-front commissions or bonuses on recurring services. The question is whether more service providers will, over time, incorporate a greater use of up-front commissions or bonuses to capture the hearts and minds of IT sales reps.
I'm interested in hearing from you -- which model do you think will win over time?
BACKTALK: Contact SVP, IPED Rauline Ochs via email at email@example.com.