Rick Butler, Karey Tsang and Donya Rose facilitated a session at the August 2022 WorldatWork Sales Comp Conference in Chicago on the above topic. We prepared some slides with an overview of what “linearity” is and why it matters, and also included some of the plan design features we’ve seen tried over the years. Click through to see the slides prepared for the discussion.
What is “linearity” and why does it matter?
Linearity is steady selling through a year, or a quarter, or even a month. This is in contrast to a pace of selling that results in most sales happening towards the end of the period. Linearity is helpful to many businesses as it allows them to smooth out demands on operations and have more predictable sales and financial results. It is particularly important in recurring revenue businesses in which steady selling leads to meaningfully more in-year revenue than “hockey stick” selling with a large portion of sales occurring at the end of the year (or quarter or month). For a detailed illustration contrasting the revenue results for steady selling vs. hockey stick selling, see page 3 of the presentation.
Several factors may work against steady selling, including:
- Sales plans with acceleration that cause sellers to focus on the overall final result without any real compensation interest in a steady pace of selling.
- Period-end leadership pushes to maximize sales. This often results in discounting to close orders before year- or quarter-end. It also often results in a depleted pipeline going into the following quarter or year, reducing sales early in the next period.
- Market expectations of discounts and more flexible terms at period-end. Some industries have “trained” their customers to hold off buying until quarter- or year-end with the expectations that discounts and contract terms may be more favorable.
Is linearity best managed via incentives?
While there is no shortage of ideas and plan features to try to focus sales people on steadier selling, there is a strong case to be made that the most effective approach will combine incentives with other initiatives, possibly including:
- Leadership commitment to holding discounting at bay, and accepting the customer’s real interest in timing of the close
- Customer offer and incentive timing to shift sales interest on the part of the customer to preferred seasonality
- Balancing any highly seasonal offerings with offerings that will be of value/interest to customers at different times.
While linearity incentives may be a great idea, they should be part of a more complete approach to smoothing out the pace of selling in the organization.
Ideas for compensation solutions to linearity presented by the panelists
(And be sure to scroll down to see the great comments and ideas offered in the session by the 80+ sales comp practitioners in the room!)
Weighted measure for linearity
- Weight Linearity at 10% of the target incentive
- Pay 7% of the annual target incentive for each of Q1, Q2, Q3 if year-to-date attainment is at or above the year-to-date goal (21% for all three ≈ 2x target)
- Ensure total plan upside offers 2x payout at 90th percentile performance by adding acceleration on the remaining components
- Very clear and very straightforward to manage
- Includes both risk and upside
- A bit of a “blunt instrument” due to binary payout
- Reduces incentive value of the core sales measure
- May result in pushing Q4 sales into Q1
Highest Rates in Month 1, Lowest in Month 12
- Add to the commission rates early in the year with decreasing adders as the year proceeds
- Rates relative to the overall annual base rate might be 1.11xBR for the first month, 1.10xBR for month 2, … 1.01xBR for month 11, and 1.0xBR for month 12
- If acceleration is annual, then over the annual quota a fixed commission adder is offered
- Makes early selling clearly advantageous
- All “carrots” from the sales point of view
- At the suggested rates, the added compensation cost is likely funded out of added revenue if any shift to earlier sales results
- Different commission rates each month may lead to complexity and confusion
- May result in pushing sales near year-end into the next year for those not into over-goal accelerators
Commission adder over quota for Q1, Q2, Q3
- Pay additional commission for all sales over quota in Q1, Q2, Q3
- Offer the highest rate for Q1, less for Q2, even less for Q3
- Can be quarter by quarter, but year-to-date over quota may be better (depends on sales cycle length)
- If normal acceleration is based on annual quota attainment, reduce that acceleration somewhat to offset this
- Easy to understand and calculate
- Clear upside for higher sales early in the year, and the higher the early over-performance the higher the payout
- Communicated as upside without risk
- May result in pushing Q4 sales into Q1
Quarterly hold-back until 100%
- Hold back 20% of the payout each quarter until 100% of the quarter quota is achieved
- Pay the full hold-back at 100% attainment (or 1% of the hold-back for each 1% over 80% of quota)
- Leverages the Endowment Effect (more highly valuing what I feel is or should be mine)
- Reasonably straightforward
- Perceived by salespeople as punitive (no upside)
- May result in pushing some sales to manage the attainment for each quarter
Independent quarter plans
- Let each quarter (or month) stand alone with its own goal and acceleration, independent of all other quarters
- Acceleration will need to somewhat less than on an annual plan due to the expected increase in over-attainment for quarters only
Note that this only works for shorter cycle selling (3 months or less)
- Strong incentive to close every quarter strong
- Fresh start each quarter
- May result in quarterly hockey sticks
- May result in over-payment vs. an annual plan for those with some very high quarters and some very low quarters
Focus leaders/teams on linearity
Because leaders’ results are made up of more sales than individual contributors, it can be reasonable to expect leaders to deliver steady selling when individual contributors really can’t
- Apply linearity incentives to leader plans without any linearity incentive for individual contributors
- Offer teamed linearity incentives to individual contributors
- Holds the sales organization accountable for steady selling even when that’s not a reasonable expectation for each individual
- Leaders may be frustrated trying to motivate individuals to support steady selling when they have no/limited incentive to do so
More frequent payouts
- Move quarterly plans to monthly to drive interest in maximizing sales each month
- Acceleration may remain quarterly or annually, or may move to monthly
- It is also possible to offer modest monthly acceleration in combination with more dramatic annual acceleration
- Drives interest in strong performance every month
- More frequent plan calculation, exception handling, admin swirl
- May not be appropriate for longer cycle sales roles
Ideas from the attendees
There were about 80 people in the session, and we encouraged them to share what they have tried, and what has and hasn’t worked well. We recorded the session, and have put together their ideas to add to the slides above:
The non-linearity appears to be attributable mostly to top performers. Xactly was able to do some analysis with their Insights data, suspecting that the poor performers were waiting until the end to close deals. However, that’s not what the data showed – it was primarily the top performers contributing to the year-end hockey stick.
Pay a bonus to those who attain at least 50% of the quarter quota within the first 2 months. One attendee shared that this is working well with their salespeople. The bonus is set as a percent of the target incentive. In addition to this bonus, they pay another bonus based on steady selling through the year. Both bonuses are “on top” (not funded out of the incentive at target).
Move the cutoff for sales credit to two weeks before quarter end. This was suggested by an attendee whose company needed to stop the chaos and bottleneck at quarter end, and it has been effective in doing so.
Offer a bonus for first half over goal. One attendee’s plan includes 10% of the annual target incentive as a binary bonus for those who are at or above the first half goal by the end of the first half. They call it the “First Half Make/Miss Bonus.”
Mid-year SPIFFs not a good idea. Several attendees agreed that SPIFF opportunities intended to accelerate selling, and announced part-way through the plan year, have not been effective in driving linearity or accelerating sales. In fact, one person shared a dramatic story of having offered a significant addition to comp for any deals currently in the pipeline for the next 18 months that were pulled forward by at least two months and closed. With a large sales team they saw only two deals move during this SPIFF.
Move from annual to half-yearly plans. Several attendees have seen some success with this plan change, moving from one big hockey stick to two smaller ones.
Offer acceleration both quarterly and annually. One person described a plan with modest acceleration for quarterly over-attainment, and much more dramatic acceleration for total year over-attainment. Salespeople are eligible for the quarterly acceleration each quarter, but once they have exceeded the annual goal then the larger annual acceleration kicks in.
Make early-in-the-year selling a criterion for the annual awards program. One company makes early selling a qualifier for President’s Club, and this has focused the most productive sellers on making sure they sell early in the year.
Significant acceleration on the way to the annual goal. One attendee described a tiered plan with 2-3x acceleration once 70% of the annual goal is attained, which focuses salespeople on quickly getting to that higher rate.
Donya Rose, CSCP, is Managing Principal of The Cygnal Group. She is a recognized expert in sales compensation plan design, regularly speaking at conferences and writing published articles. She serves clients from F500 to growth-stage businesses, and advises WorldatWork on sales compensation hot topics and best practices.