Of the 10 Principles of Economics, the 4th one says - “People respond to incentives” and this is 100% true. At Cogno AI, we implemented Incentives for the client-facing teams, and suddenly revenue shot up, client satisfaction went up and employees also became happier since they got an opportunity to earn more.
I believe that all the Startups who want ownership of the team members should set up incentives for hitting certain agreed targets. This gamifies the experience for the employee as well. And they feel motivated to achieve the target.
At Cogno AI, we have 3 client-facing teams:
- Sales Team: this is the team that gets new purchase orders/contracts on the table.
- Operations/Delivery Team: this is the team whose job is to implement the project.
- Customer Success Team: this team is responsible for taking care of the existing clients.
All the teams operate at different stages of the client’s life cycle and therefore, the metrics for incentivization are different for each of them. Let’s now look at the role of each of the teams, along with how we created the incentive structure for them.
In a SaaS business, the most important metric to track is the MRR - monthly recurring revenue. Let’s say a client pays $12,000 per year, then that translates to $1,000 worth of MRR. The job of the Sales team is to bring new clients so that the MRR goes up.
In our business, some clients pay on a monthly basis, others pay on a quarterly and most of the clients pay on an annual basis. It would be safe to say that an average client pays once every 6 months. So, let’s keep that as the benchmark for a typical contract.
At the beginning of each quarter, each member of the Sales team is given a certain invoicing target based on the MRR. So let’s say, 1 client is $1,000 MRR for 6 months, then that’s an invoicing of $6,000. Let’s say 1 Salesperson can close 5 such deals every quarter. So, they’d have an invoicing target of $6,000 x 5 = $30k.
So, an incentive for a Salesperson could look something like this:
x% of $30k
x% of $30k + (x + y)% of $6k
x% of $30k + (x + y)% of $6k + (x + y + z)% of %6k
You get the idea. Note that the numbers are not actual. They’re only indicative.
Basically, you first define a threshold below which no incentives are paid - you’re anyway paying the base salary for such situations :)
Above a certain revenue threshold, a fixed percentage of the total invoicing could be paid. If the client has agreed to an annual invoicing, we pay the percentage on the annual invoicing. If the client, however, wants quarterly invoicing, we pay the percentage on the first quarter invoice only. The subsequent quarters would go to the Customer Success Team.
This way, the Salesperson is also incentivized to sign annual contracts and not monthly or quarterly. Annual contracts are important in our business because we work with really large Enterprise clients and have to spend substantial efforts in acquiring/onboarding them. An annual upfront payment helps us maintain cashflows and stay bootstrapped and also pass on some discounts to the customer.
A few things to note:
- Incentives are to be disbursed when money is realized in the bank. Large enterprises typically do not pay via Credit Cards and so, it may take some time before the money hits the bank. Therefore, incentives are disbursed only when the money hits the bank account.
- There is a sharp cliff at a certain amount below which no incentive is paid. In the above example, $30k is the cliff. If a Salesperson doesn’t get that on the table, they don’t get any incentive at all. This is to ensure that they fight for a certain minimum target.
- The cliff mechanism helps you get predictability in your revenues. Let’s say you know that 60% of folks hit the target and 40% of folks hit only half of the target, then you know that the revenue expected from 10 Salespeople would be $30k x 6 + $15k x 4 = $240k. If you would not have set the target, trust me, the 60% number would have been much lower.
- Above $30k, there is another target ($36k). Make sure that above the cliff, the incremental incentive is not smooth, but again a target-based function. This means we won’t pay flat x% above $30k. We will rather pay x% of $30k and anything above that would be paid only on achieving $36k. This also keeps the Salesperson motivated to achieve another milestone.
- It is always better to plan the quarter ahead in advance and communicate to the Salespeople about what deals would they be targeting. This way, they have clarity on the plan of the quarter, and they won’t pick up any random lead in the middle of the quarter.
In addition to setting these targets, my Sales head also conducts weekly check-ins to see if the team is stuck at some client, or needs some help or guidance in navigating some deal.
When the Sales Team signs a contract, a pre-defined amount is agreed which the client will pay as “one-time setup fees”. This is fairly common in the Enterprise space. The client pays this amount when the implementation goes live. We pay incentives to the Operations team on this one-time setup fee.
The Project Managers are supposed to ensure that these projects are delivered timely to the client’s satisfaction. One challenge that often happens is - how to create a balance between speed and quality?
To solve this, we ensure that the Customer Success team provides a sign-off for each implementation going live. This way, they can block a Project from going live if they don’t feel it to be satisfactory. Project Managers definitely don’t want this because their incentive is at stake.
Coming back to the incentive piece, the Project/Delivery Managers are also given a list of projects that they are supposed to take live in a specific quarter. Since we work with Enterprise clients, 1 - 2 months is the usual delivery timeline. so, we have to look at a quarterly horizon.
At the beginning of each quarter, the Project Manager commits the list of projects that they are going to take live in that specific quarter. This is mutually agreed upon rather than being one-sided. For each project, the incentive amount is a percentage of one-time charges.
They’re then paid a flat amount which is a percentage of the total one-time amount. This is paid only when they meet the delivery target. The slab system holds much like the Sales team where if the Project Managers are able to make more projects live, they’d be paid even more. So they have an “uncapped” incentive.
Customer Success Team
The primary objective of the CSM Team is to:
- Ensure timely renewals
- Avoid churn
The Customer Success team is much like the Sales team where instead of getting new revenue on the table, they are getting the renewal revenue on the table. Therefore, like the sales team, they’re also paid a fixed percentage of the renewal revenue.
This means that if there is a significant client churn, they’d lose out on their incentives. They can, however, cover that up with an upsell. You may want to have a separate incentive amount if the Customer Success Team is able to keep the churn below a certain percentage. You may also want to give them a higher incentive percentage for upselling as against renewals because obviously, upselling is tougher than renewing.
So, that was about the basic incentive structure for Sales, Operations, and the Customer Success Team. You should tune your exact numbers as per your business. However, a suggestion would be to make sure that an average performer has an opportunity to earn 1 month of salary extra every quarter, in the form of incentives.
So, if you’re paying someone $5k a month, ensure that they can earn up to an additional $5k per quarter in the form of incentives. And if they are a rockstar performer, they should be able to earn up to $7.5k extra every quarter.
Apart from the above incentive structure, we also have incentives for lead generation. Let me explain in detail.
We work with a lot of enterprise clients and there is a huge opportunity to upsell and cross-sell within the client.
- Upsell: selling a higher plan to the same customer
- Cross-sell: selling 1 more product to the existing client, or selling the same product to a different team within the same client.
All our clients are large enterprises and so, there is a lot of opportunity for upselling and cross-selling. For that, we need to know about these opportunities within the client. Guess who knows about these opportunities the best? The Operations Team and the Customer Success Team.
These teams keep on interacting with the clients for Project Management or Business Review activities. Therefore, they know the best about the client:
- Are they happy with us?
- Are they looking for some other solutions?
- Are there other business teams who might be looking for our solutions?
- Are they looking for related products?
So, they are the right teams who can generate leads within the existing clients. We, therefore, pay incentives per lead generation to the members of the Operations and Customer Success Teams. This ensures 2 important things:
- There is a continuous lead inflow from existing clients.
- Project Managers and Customer Success Managers take good care of clients because they know if the client is unhappy, there is no chance they can generate leads.
For the lead generation incentive, we pay per qualified meeting, irrespective of lead closure. Let me explain with an example. Let’s say that we have already implemented our SaaS solution with the Retail Banking team and the Project Manager is able to convince the Retail Banking Head to refer us to their Corporate Banking Head. Now, it is the job of the Project Manager to reach out to the Corporate Banking Head and set up a meeting with the Sales Team for a demo.
If this meeting happens and the Sales Team member qualifies the lead, we pay the incentive to the Project Manager. We pay this even if the Corporate Banking Lead doesn’t get closed. Why? So that the Project Manager can go back and work on their main job - Project Delivery; rather than chasing the Corporate Banking Head for closure. Let the Sales team do the closure.
This method of “internal lead generation” has been really helpful and has got us several closures within existing clients. This not only helps generate revenues but also helps build deeper relationships with existing clients.
I will summarize this article with a few key points:
- Be generous in paying incentives such that it is a win-win for your team members as well as your business.
- Make sure to pay the incentives on time. Usually, companies fool the employees in the name of the variable components. Don’t do that.
- Keep incentives quarterly. Monthly would be difficult to track and annually would be too much. Keeping them quarterly ensures that the team doesn’t lose motivation and keeps chasing.
- Keep incentives milestone-based. This helps bring predictability in revenues and ensures money isn’t paid unnecessarily to underperforming employees.
- Maybe use a structured incentive tracking system. We have programmed an in-house invoicing system and so, the incentives are automatically calculated depending upon who raises the invoice.
Hope that this helps you build an effective incentive structure and grow your business.
In case we are meeting for the first time - Hello, this is Aman Goel, Co-founder, and CEO of Cogno AI. At Cogno AI, we help Businesses with an Omnichannel Contact Center for Sales and Customer Support. We work with several Large Enterprise clients as well as Startups.