Developing our compensation strategy: a CEO's guide
In his tenth article, Mark shares a 2017 experience – when he reworked the field team’s compensation plan, ensuring much better teamwork and helping to retain top talent in the process.
In 2017, just as it looked like we’d need to lay off between 50 and 100 people, we turned things around. In my last article, I shared how we avoided these layoffs and how I managed to keep my job.
In fact, it was the beginning of 20 consecutive quarters of growth. For five years straight, each quarter’s revenue was greater than the quarter before it. Nexient was certainly heading where we wanted it to go.
A crucial ingredient in driving this growth was the compensation model we introduced. When I arrived at Nexient, the model for our client partners was complex.
Finding talented people
The backbone of our client teams and client partners needed to be practitioners with deep expertise in software product development as well as talented salespeople. Finding people with this skill set is difficult, let alone attracting and retaining talent, so we needed a world-class compensation plan for them.
In our organization, we also had sales executives. They were responsible for opening doors to new clients and new divisions of large, existing clients. These people were excellent at building strong relationships, helping us to work closer with prospects to deliver a better answer to their requirements.
Client partners and sales executives would ideally work together. However, with the compensation model in place in 2017, client partners preferred not to.
They received one rate for selling client work directly and half that rate if a sales executive participated in the process. Good customer-facing people will always figure out how to optimize their earnings, so in this case, they quickly developed a habit of excluding the sales executives from any leads.
I needed this to stop for a number of reasons:
Teaming up to help a client is always best – it brings different perspectives and makes you a better listener.
Client partners rate their client-building skills, and sales executives receive payment for doing this.
Having two people involved in a process builds in some redundancy. If one person is out for a while or leaves the company, things can continue.
How we calculated compensation
The steps to calculating a compensation plan do not make for the most riveting read, but I want to broadly share with you what we did in case you are looking to do the same.
We first looked at how much the business could actually afford to spend on sales compensation. In our financial model, we wanted expenses for the sales team to run at a certain percentage of revenue. To keep the math simple, let’s use 4% as the target. This would mean that when they hit their plan, both the sales executives and the client partners would each make approximately 2% of revenue.
In addition to greater team cohesion, we had two other key drivers for our plan: profitability and growing existing accounts.
We wanted the team to drive the right level of profit margin, and we had a great list of clients who we needed to focus on delighting more (the best measure of this was whether they spent more money year on year with us, so we set the target at 25% growth annually).
Whether a team hit their plan or not was complex, especially for the client partners. We gave them two “multipliers” (our two key drivers) that affected where their percentage of revenue landed.
Aligning the plan with our margins & growth aspirations
We’d start with the 2% of revenue mentioned above and then multiply by our two key drivers to determine their percentage:
Margin – This would set a target margin level and for that level, we’d multiply by 1. If they hit much lower, we’d multiply by as little as .5 and if they really exceeded their target margin, it could go up to 1.2. So, based on this factor alone, their payout could range from 1% of revenue to up to 2.4% of revenue.
Growth – The target for growth for an account year-over-year was 25%. So if an account had grown that much, this factor would be 1. If an account had grown less than 15% for the year, this factor would go down to .5. So this factor alone could make the 2% target range from 1% to 2% of revenue.
When you put both factors together, you’d get a fairly wide range. If both factors were at their lowest level (missing the account margin target and less than 15% growth), your payout would be 2% x .5 x .5 or .5% of revenue. If both factors were at their highest (exceeding the target for account margin and 25%+ growth), your payout would be 2% x 1.2 x 1 or 2.4% of revenue.
4 steps for a winning compensation strategy
Many aspects of this model functioned exceptionally well:
It attracted people who would be a good fit for the early stage of the company. We needed high-performing individuals who were going to be entrepreneurial and thrive without a lot of structure. Strong candidates who were highly confident in their abilities would look at this model and realize they could make a lot of money. People who needed more guarantees and structure than we could offer would look at it and think it was too risky.
It was different from what most large companies were offering. Many of them had a cap on pay and benefits for their field teams.
People usually put these caps in place to ensure nobody was exceptionally overpaid. They would set them at something like 50% of their base salary. People at leading firms would see our model and be even more attracted by its potential for additional compensation.
It fully aligned with our needs as a company. The more someone could sell and manage, the more it fit our financial model.
The best thing that could happen to us was that someone blew up the forecast and sold an enormous amount of revenue. We’d pay them a lot, but it just meant that we’d drive revenue growth for Nexient within the model we set up. The more, the merrier.
It aligned our team. Our client partners now receive the same pay whether they work with our sales executives or not, ensuring they earn competitive rates based on the market and external conditions. I sometimes had to nudge them to get back into this habit, but the argument was pretty straightforward—wouldn’t you be better off working with someone on this than by yourself?
It had its challenges too. One of them was that it didn’t align with GAAP (our core accounting practices). When our finance team created interim reports, it was difficult for our field team to see exactly how much they would earn within their pay range.
Also, after finance closed the books for a period, they’d have to spend a fair bit of time calculating these commissions. A lot of work was involved in aligning our employee compensation with our strategy, but it was worth it for helping position us as an employer of choice in the market.
Our philosophy for calculating staff compensation
The science of calculating staff compensation may seem fundamentally numbers-based, but the figures come from underlying drivers around company culture and behavior.
A strong compensation strategy should not only consider financials but also align with the company’s compensation philosophy and the broader work environment.
When paying employees, it’s essential to ensure that the model reflects market data and is competitive with the external market. This means building a system that accounts for all aspects of compensation, including base salary, incentives, and any additional benefits.
Align the model with the company’s financials and then turn the team loose. The model you build for your field team must be tightly aligned with your company strategy. You want it set up so that if the team keeps going, they and the company win. I’ve never understood caps on commission plans. Is the company saying, “We’d like to grow, but not that much?”
Think about all the angles on the plan – the field team will. You absolutely have to think through every angle of a new comp plan. One example is that for brand-new clients, there is no year-over-year growth rate, so we’d just pay out full credit for growth for the first year. A good field team follows the money, so consequently, pushes hard to get more new clients. This wasn’t what we designed, but it wasn’t the worst side effect, either.
Never compensate for behavior that takes away from a team effort. When the plan paid more for client partners who worked independently, it put incentives in place to do exactly what the company didn’t want. Once we addressed that (and people got over bad habits), we consistently had a better team approach to new and existing client relationships.
Executives should own these plans – don’t hand them off. They are the point at which your strategy comes to life. I worked intimately with my leadership team to build these plans and think through all the angles. So critical to the company’s success is how the team approaches clients. I couldn’t imagine handing this off and not being involved in setting it up.
