2024 XaaS Sales Compensation: Top Focus Areas to Drive Growth

Sales compensation leaders in the XaaS industry face significant challenges in this plan design cycle. According to Alexander Group’s latest survey findings, XaaS sales compensation costs are rising due to changes in headcount, pay levels and plan designs. Consequently, companies must boost productivity to maintain their cost of sales. Leaders recognize that the primary lever to drive strategic growth goals and behaviors is the sales compensation plan. So, what key areas are companies focusing on during this fall’s sales compensation design planning season? Alexander Group has identified the top six focus areas that companies aim to address in this year’s sales compensation plan design cycle.

Determining the Best ILEAR Metrics/Mechanics

The XaaS engagement model is inherently complex, requiring numerous resources to work across the ILAER motions—Identify, Land, Adopt, Expand and Renewal. This complexity increases when considering the sub-ILAER motions. For instance, the Expand phase can be further divided into upsell, cross-sell and new department/buyer engagements. Sales compensation design teams must navigate the challenge of selecting the appropriate ILAER metrics and integrating them into the sales compensation plan.

Should these metrics be weighted measures tied to the target incentive, and if so, what should the weight distribution be (e.g., 60% new ACV and 40% renewal ACV)? Alternatively, should the metrics be structured as add-on bonuses (e.g., 2% additional commission rate for renewal ACV), credit modifiers (e.g., 1.5x credit for new logo ACV or 0.5x credit for renewal ACV) or hurdles/gates (e.g., higher accelerators upon achieving renewal ACV goals)? Additionally, there are various types of ILAER metrics to consider, such as dollar metrics (new ACV), rate metrics (renewal rate %) and activity metrics (number of new logos or number of adopted users).

Compensating for Multiyear

Securing multiyear contracts is crucial for most XaaS companies. These contracts lock out competitors, secure pricing, reduce renewal motion frequency and provide a longer timeframe for customers to realize the solution’s value, especially for large technical solutions requiring lengthy deployments. Most companies transitioned from total contract value (TCV) to annual contract value (ACV) years ago to standardize term lengths, improve quota setting and better align with financial annual recurring revenue (ARR) goals.

There are two primary methods companies using ACV employ to reward multiyear deals: add-on bonuses and quota credit modifiers. However, there are multiple ways to calculate these rewards. Add-on bonuses can be expressed as a rate multiplier, a flat commission rate or a flat bonus amount. Credit modifiers can provide uplifts for long-term contracts and downlifts for short-term contracts. Additionally, add-on bonuses and credit modifiers can be applied to the ACV value or the outyear value (OYV). For example, a 20% credit could be provided for the values of years 2 and 3.

Consumption Pricing Model

Consumption- or usage-based pricing models are becoming increasingly prevalent in the XaaS industry. According to Alexander Group’s latest survey, approximately 40% of technology companies have adopted a consumption-based pricing model. Many companies grapple with selecting the right measures for this pricing model. The appropriate metric options depend on both the seller’s role and the contract model the company is using—Committed Spend (Funds/Credits), Committed Pricing (no committed spend), Pay-As-You-Go (no contract), and Hybrid Commit and Pay-As-You-Go.

Metric options include ACV, estimated ACV, consumed revenue and the number of contracts/activations. The selection process becomes more complex for companies with multiple pricing models and the need to ensure parity across models. Some pure consumption companies use both ACV and consumed revenue to recognize efforts in landing a contract and driving ongoing usage, following a “land and consume” strategy.

Compensating CSMs & Adoption

Customer success managers (CSMs) are primarily focused on the Adopt phase within the ILAER motions. Customers who adopt and realize the value of the subscription solution tend to have higher renewal and expansion rates, leading to higher net retention revenue (NRR). Currently, 80-85% of XaaS companies (depending on the cohort) place their CSMs on a sales compensation plan. However, many of these companies lack effective adoption metrics. They often rely on lagging indicators such as renewal and expansion measures.

Leading-edge companies, on the other hand, use multiple adoption metrics within a customer scorecard or health score. These metrics include a combination of activation/deployment, ongoing usage and usage quality, such as the use of advanced features and the breadth of suite usage, which are correlated with higher NRR.

Managing Sales Compensation Costs

With the focus on profitable growth, many CFOs are keen on benchmarking their cost of sales (COS) and ensuring a high return on investment (ROI) from their sales compensation spend. Sales compensation leaders should review their plan designs to identify pay-for-performance misalignments and compensation plan “leaks.” One common issue Alexander Group has identified with multiple XaaS clients is the overuse of add-on bonuses and secondary/tertiary measures, as well as quarterly performance periods that create a misalignment between quota attainment and target incentive attainment. An extreme example is a seller achieving 80% of their quota but receiving 120% of their target incentive. A simple pay vs. performance scatter plot (% of total target incentive on the x-axis and % of ACV quota attainment on the y-axis) can highlight these discrepancies.

Aligning Partner Metrics

The technology industry partner ecosystem has been transforming its revenue/service mix and strategic value​. Partners are moving from selling products with implementation, consulting and training services to selling recurring revenue services like XaaS and managed services. This change is impacting who their buyers are as well as their engagement model. Consequently, vendors are evolving their partner programs and partner incentives.

Sales compensation design leaders fully understand their partner strategy, partner programs and incentives to properly align the sales compensation plan to the same objectives.​ Partner account manager plan metrics used to focus only on assigned partner sales or partner sales within an assigned geography. Now, many XaaS companies include sourced or influenced ACV metrics when they can effectively track these via partner registration and CRM hygiene.

Conclusion – Structured Sales Compensation Planning

Sales compensation leaders must follow a structured process to navigate the complexities of the XaaS industry. This involves understanding stakeholder needs, creating options with clear pros, cons and implications, and facilitating collaborative solutions. By doing so, they can effectively address the top six focus areas identified for 2024, ensuring their sales compensation plans drive strategic growth and align with company goals. Through careful planning and execution, leaders can optimize their compensation strategies to support profitable growth and maintain a competitive edge in the market.