Are You Paying Commission for Sales That Would Have Happened Anyway?

Sellers made you $100M of revenue last year. You paid them $10M in incentives. Did your incentives drive any of that revenue? 

That is something that most Sales Compensation, Revenue Operations and Finance professionals don’t ask.

Most look at revenue and payout when trying to determine the effectiveness of an incentive plan. As long as revenue is up and sellers are hitting quota the plan is doing its job.

The flaw in this thought process is simple.

You are selling to people who get paid to sell.  

They are already selling. There are likely deals that would have closed regardless if you changed the plan. Renewals that were guaranteed. Sales that came in through outbound and inbound motions. Sales that the customer would have made if there wasn’t an accelerator for their rep.

All of these scenarios could be occurring and you are still paying commission on top.

So the real question is… 

Are you paying your sellers on sales they drove or just paying on sales that would have happened anyway? 

1. Sales Aren’t the Same Thing As Incremental Sales

Let’s take an example of a SaaS Company that has $50M of renewals.

Each year 92% of those customers will come back.

They decide to offer more incentives around retention and end up paying out $2M more in commission.

Those customers continue to come back and they make $46M in revenue from their renewals.

Great! You have a high retention rate. Right? 

Well maybe those renewals were happening regardless of your plan change.

This is something that we see across many verticals.

Here’s a quick example from a telecom provider.

There are millions of wireless customers across the United States and Canada. Let’s say that 88% of eligible wireless customers are going to come back or upgrade each year regardless of seller involvement.

Your company decides to pay more towards upgrades and ends up generating $50M of upgrade revenue.

Yes you have $50M of revenue but that isn’t necessarily $50M of revenue because of your incentives.

By understanding incrementality you can figure out what sales were likely to happen anyway vs. sales that your plan influenced.

You can also dig deeper into product mix. Did your incentive drive customers to purchase higher tier products? Maybe your plan influenced customers to buy 5G over normal wireless or added broadband to their wireless package. You could have improved retention and lost money by offering more discounts. All of these factors need to be taken into consideration when measuring the incremental value of your plan.

Another example would be insurance. 

You may have a P&C book that sells a lot of new business but your producer has a very high rate of renewals. Their renewal rate may be around 94%. 

You add more incentive for retention and that rate goes up to 95%.

Is that all due to your incentives? Maybe. There could have been other factors that improved that number.

Not only do you want to look at the amount of business that you retained but you also want to analyze what kind of business you retained.

Are your loss ratios okay? Did your producers hang on to business that you may have wanted to price differently?

When measuring incrementality in insurance you want to know that you are increasing profitable persistency.

How about SaaS? 

Your company is paying accelerators on expansion ARR. A large customer expands their account by $2M and your seller gets a nice chunk of change from closing that deal.

Sure that sale is attributed to that seller but did they expand that account because of your plan? We don’t have enough information to say that for sure.

You want to understand if your incentives helped that seller drive more expansion. Did they expand more customers? Did those customers buy more? Were they able to reduce discounts? There are so many questions you can ask when determining incrementality in SaaS.

2. Paying Your Sellers on the Sure Thing 

Once you understand what revenue your incentives are driving you can calculate how much money you are giving away on the sure thing.

If you have $200M in sales and pay $20M of incentives. You may think that you gave away $20M for those sales.

Maybe some of those sales would have happened anyway.

There may have been great outbound motion from your sellers. Customers may have already been committed to buying from your company. Or there may have been demand that your plan didn’t play a role in.

By analyzing what is incremental you can determine if you are overpaying your sellers.

You still want to pay your sellers on the sure things but you should understand how much value you are getting from your incentive program.

 3. Create a Framework to Measure Incentive Incrementality 

Sales Compensation Revenue Ops and Finance can all benefit from a framework to help measure incrementality.

First identify your baseline. What typically occurs when you don’t change your incentives?

You may want to use past results or seller cohorts to help determine a baseline.

What do you want to drive from your incentive program? More new logo sales? More premium products sold? Less discounting? Higher retention rates? Once you identify what behavior you want your sellers to exhibit you can begin to measure.

If you increased your retention from 90% to 94% by changing your plan. That may have been an incremental 4 points. Of course you want to consider other factors but now you have something to work with.

Once you know what you drove you can begin to measure the value of those incremental sales.

Incremental Sales x Contribution = Incremental Value 

Then factor in retention and other variables. Now you can compare the incremental value that you created with the cost of your plan.

Are you paying $1M of additional incentives to generate $4M of contribution? If so that may be worth it. What if you paid $1M more and didn’t drive any incremental value?

You now know that you increased sales by driving more new logo sales and generated $X of incremental revenue.

Instead of asking did you drive more sales you are now asking. Did I change my sellers behavior to generate more sales?

4. Measuring Your Plan for Incremental Sales Should Be Constant

You should always be asking yourself if your plan is creating more incremental sales. There are so many aspects to your plan that you can tweak to help drive more value from your incentive dollars.

As mentioned above you can use technology to help drive these conversations as well.

It isn’t always easy to know what is incremental and what isn’t but you should have a rough estimate of what you are driving.