Recurring revenue presents a challenge when used to measure seller performance. Unlike new business metrics, which more easily allows a sales leader to monetize seller influence, recurring revenue can paint a blurry picture.
First, let’s understand the origin of the problem. At the start of a sales year, recurring revenue streams do not start at zero – therefore, the seller never starts the year at a zero attainment. Instead, they can assume to have some attainment based on the incoming revenue streams.
What options are there for sales leaders who want to compensate sellers to drive outcomes but have attainment from prior year buy decisions? The high water mark compensation plan is one great option.
High Water Mark in Sales Compensation
High water mark compensation plans reward sellers for exceeding previously high performance levels. While total revenue could trigger some compensation, premium compensation comes from the growth over the threshold – or high water mark. Here is an example of how it could work:
Initially, the book of business was given a revenue target of $100. In Month 1, the seller achieved $150 and was rewarded with base commissions up to the high water mark (or $100) and accelerated commissions based on the $50 that exceeded the high water mark.
In Month 2, a new high water mark was established at $150. Since the seller only achieved $130, no accelerated commissions were paid. The seller only earned base commissions on the $130 result.
In Month 3, the high water mark remained at $150 and the seller achieved $175. The seller earned base commissions on the first $150 and accelerated commissions on the $25 that exceeded the high water mark. Subsequently, while it’s not illustrated in this example, the next month would follow suit with a new high water mark set at $175.
Interestingly, some refer to the high water mark compensation plan as a dynamic quota. This is a good observation since the monthly sales target dynamically changes when needed to reflect a new high.
By Role or Business Strategy
The high water mark compensation plan is not for every role. True hunters – e.g. business development managers – are still best paid on new business metrics like annual contract value or bookings. However, for pure farmers – or even hybrid sellers – the high water mark approach represents a viable option as the organization’s and seller’s interests are aligned. Both benefit as new business closes and existing recurring revenue grows. Notably, this compensation approach also works for subscription and consumption-based business models.
Traditional compensation approaches have limitations for certain roles and certain business models. The high water mark approach is flexible and should be considered when a change in sales compensation strategy is needed.
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