You Get What You Incentivize
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Psychology is the most underrated subject an investor or leader can study.
Show me the incentive, and I’ll show you the outcome. (Charlie Munger)
Like with most Munger-isms, I think about this a lot. Incentives are the most powerful force in business. If you study them long enough, you’ll eventually learn why people act a certain way.
The most common place to leverage incentives in a business is compensation for executives and the sales team. I want to hit on both of these briefly with the understanding that I can’t do it justice in 500 words. There are several great resources on sales comp, and I recommend tracking them down.
With the lack of nuance in mind, one thing that all executives should keep in mind is how powerful incentives can be when compensating their sales team.
A good example is over-indexing on closed ARR only. We may think this straightforward number keeps things simple, but it also creates the risk of account executives only chasing whales.
Often, in industrial SaaS, the sales motion is “land and expand,” meaning we take smaller contracts in exchange for shortened sales cycles on the expectation we’ll be able to get the customer to expand into a bigger contract.
Focusing only on closed ARR risks forgetting about the small customer with enormous potential. The solution here is to reward logo counts as part of the compensation plan, ensuring commissions reward both the size and number of deals.
Another common pitfall is rewarding account executives mostly on the ARR of new customers and not weighting net dollar retention heavily enough.
By adding the right amount of NDR achievement to bonus structures, we incentivize account executives to score high-quality customers AND keep them happy throughout their contract.
As always, these short posts oversimplify a complex topic. You can add multiple variables to sales compensation to achieve the outcome that aligns best with your with your go-to-market strategy.
It’s always important, however, to think about what you’re really incentivizing as you build your plan. The outcome might not always be the one you want, but it will always be the one you incentivized.