How to Pay Commissions on Multiyear Deals with Handoffs
Here’s a question for sales ops and sales compensation practitioners: How do you handle long-term sales expansions, in terms of credit distribution?
Here’s the scenario: a salesperson sells a small deal because the company they are pursuing is not ready to purchase your product or service on a larger scale. However, they may be ready to do so in a year or two. Should the salesperson continue to work that opportunity that exists 1-2 years in the future, or should they hand off the opportunity to an account manager (AM) or customer success manager (CSM)? If it is handed off, who gets credit for the future sale? Finally, at what point does sales lose these opportunities?
Two ways to address long-term sales expansions
There are two ways companies deal with this issue based on the handoff between the new logo seller and the account manager:
1. Setting Quotas for Immediate Handoffs: If the process is for the new business seller to win the work and then immediately hand the relationship on to the account manager, the company will set an appropriate quota based on the expectation that the new seller will only sell small, lead-in deals. There are some challenges with this approach: the new business seller will typically have built up a positive relationship with the new client, which might be eroded with the immediate handoff unless the account manager has been involved in the new business pursuit and has established their own relationship with the client. The quota based on small scale sales will be prone to inaccuracy if the new business seller lands a relatively large initial sale. In this case, there will need to be rules around windfalls and quota adjustment.
2. Accounting for Account Growth: The second approach is based on the new business seller retaining a role in managing the new relationship with the account manager for an initial period post the first sale. Typically, this is for the first 12 months. The selling company will have an expectation of account growth in the first year, and it will take the two sales roles plus services to make sure the goal is achieved. The new business seller will then have a quota that includes this growth expectation and will receive credit for all sales in the first 12 months. The advantage for the selling company is that the positive relationship developed by the new business seller is maintained and the transition to account management is smoother. Also, the hunting instincts of the new business seller will help develop additional sales where the account management style is more conservative. However, the downside is that the new business seller has a more complex role balancing acquiring more new logos or making sure there is positive account growth. There is also potential confusion about who is managing the relationship. When this approach is taken, the incentive plan typically reflects the different value of new logo sales vs. account growth with different commission rates or separate metrics, with different payout curves.
In general, the first approach has more downsides than upsides, and historically, we see the second approach more frequently. In terms of multi-year deals, the second approach lends itself to crediting these through taking the first-year value of the contract and applying a multiplier for the length of the contract, often differentiating based on the number of years in the contract up to the point of renegotiation.
Overall, the handoff is the key. The initial relationship is with the business developer, so there must be a process for making a change to another account manager to ensure that the customer has a good experience and does not feel “handed off” after the initial deal is sold.
An additional consideration is that most often, the customer will not begin with a large order. Instead, they may start with a small sale to see if the product or business relationship is good for them. With this in mind, often the business developer will work harder for the customer relationship when they know they can get repeat business for 12 months and then maybe even a partial credit for a period while the transition takes place to the account management team. This may look like 25% or 50% credit for a six-month period after the handoff. Therefore, it is important for both the new logo seller and the account manager to share a quota for the account so that they both have some “skin in the game” with the customer.
Have an additional incentive compensation plan design or commission structure question? Join us for our incentive compensation round tables or email us at email@example.com.