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New SaaS Startup - Help determining best commission structure

saas commission plansThe main solution is a SaaS based solution that ideally the company wants to sell a minimum one year deal, but would accept a month to month if needed to close a deal and as they grow. A maximum deal would be three years in length. So based on that background what are your thoughts on a fair compensation plan for the following. 1) A one year deal paid up front – My thought is the rep gets “X” percent paid after invoice is received, I am just not sure what is a fair “X” 2) A month to month deal – I think same as # 1 just paid monthly 3) A 3 year deal paid annually – I think this should be like # 1 but “X” should be a bit higher 4) A 3 year deal paid up front – This I am not real sure on as a rep could leave mid contract and someone else has to manage an account they get no money on 5) What about a plan for the sales manager who is both a contributor and manager? Lastly what about channel compensation for the same SaaS solution, your thoughts? I appreciate any feedback you can offer or if you can point me to a website, etc. that might help me I would be very grateful.

Answers

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

To start with: I would only pay commission on cash receipt.

As far as 1 year, month to month or 3 year; it should be based on profit margin. If the margin goes up for a 3 year deal, maybe you pay more (or maybe not).

Make sure you commission agreements stipulate that commissions booked during term of employment are payable when cash is received. Installment sales are based on invoice dates of installment. In other words, if I closed a sale on Monday and left the company on Friday, I would be paid the commission on the associated invoice when it paid.

If it was a 3 year deal payable annually, I would only get the first year.

Sales managers would get an override on all sales (less those where he/she is the salesperson).

Channel compensation could be similar, but X may be lower/higher depending on the cost of maintaining the channel as well as the current market conditions for channel deals in your side of the industry.

Dave Hunt
Title: Corporate Controller, Senior Director
Company: Host Analytics
(Corporate Controller, Senior Director, Host Analytics) |

For a SaaS based company you should have the sales team focused on building a recurring revenue stream (ARR) and pay them based on incremental ARR and not bookings. If sales team is paid on bookings then they will focus on total bookings and not ARR which tends to drive ARR lower not higher especially on prepaid deals that are multi-year. (which get discounted) The reps can get additional bonus for cash upfront and\or mulit-year deals. (integral part of their comp plan and their variable comp broken out into the different pieces) Also consider having the comp plans structured such that accelerators do not get paid until the annual ARR goal is met. Having compensation paid based on cash receipt from customer is definitely ideal.

Privato Student
Title: Executive
Company: Verofin
(Executive, Verofin) |

I agree that one should set Sales Staff focus on landing deals that keep contributing to SAAS company over a period. I would start by looking at how KPI's are set for the sales department. A SAAS company will most likely be of the opinion that their valuation will follow Metcalfe's law. This means that the company is valued proportional to the number of members ^ 2.
I also consider the profitability per client will increase as more people join as the fixed cost per client will decrease.

With this in mind my opinion is that I would be willing to pay a sales rep more every year/month the client stays on the system. The same holds for clients that pays upfront in cash. The Sales rep would get 0.7*X but if that client renew the second year then the rep would get X and if the client renews for a third year you could get 1.2*X

Advantages of this approach is that it is better aligned with corporate profit, encourages longer employment and improves customer service.

Anonymous
(EVP & CFO) |

I run a SaaS software business, and I am also the CFO of the parent company. It is a very complicated discussion with many levers. The above answers only scratch the surface. Here is a summary of what we do:

- We have list prices the sales team has some room to negotiate.
- Same commission rate for all length of sales. Reps are incented to sell multi-year deals because there are more commission dollars.
- We pay 100% of the deal commission upon the first quarterly invoice regardless of contract length. This is definitely a tradeoff. However, it keeps the reps hungry to sell more because they are not building a book of future commission payments.
- We charge customers a premium vs. our 3-year price to sign a 2-year, 1-year or MTM contract.
- You are just starting out, and it appears you are going to have the sales reps service who they sell? These are very different skill sets and will take time away from selling new customers and building your revenue base.

Anonymous
(Controller) |

I agree with Mr. Hunt's comment. We never pay commissions based on booked revenue. That type of structure is complex to administer and ripe for fraud. In my experience you need to focus your sales staff on higher margin services and good clients. I am the Controller for a large SaaS company and after many years of an overly complex commission structure I had a heart to heart meeting with the Chief Sales Officer and we developed a simple commission structure that pays based on net collected revenue and established quotas focused on selling recurring high margin revenue services. This is so much easier to explain to the sales staff and they know with certainty what to expect in terms of pay. An alternative method is to pay them the commission upfront which is risky but you no longer have a complex tracking method to manage and the reps know they have to keep bringing in business to make money. This is the real estate broker approach as some like to call it.

Avoid paying commissions in perpetuity or it will be a disaster. Incentive your channel partners (if you use any) to sell higher margin services and give them a structured flat rate commission structure that increases in rate as the amount of net collected revenue they bring in rises. This keeps everyone honest and focused on real cash generation for the Company.

John Argo
Title: Consultant
Company: Independent Advisory Services
(Consultant, Independent Advisory Services) |

I'm grappling with the same. We just pay 90 days after payment with a fatter commission as a temporary arrangement. Our senior sales guys are fine with this while we work out a new scheme. I'm working towards something with the following features:

1. Commission paid 30 days after invoice payment. Our customers generally don't do PO's so some invoices I'm requested to create end up being hopeful rather than committed sales.

2. Commissions paid over life of contract. I want to allow for cases where a customer cancels subscriptions, although we have not had any cancellations.

3. Smaller commissions for renewals (50% of original commission rate?). The selling effort should be much, much smaller.

4. Extend commission payment structure to be 2/3 first year of agreement, 1/3 second year (or year after subscription), paid monthly. The objective is to smooth out the ups and downs and to create some handcuffs. This will be tough and I'm not sure the legal issues surrounding this. I read about a commission bank structure that had appealing characteristics.

5. Split between individual and group level.

6. Steak knives for second place.

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

Why would a salesman accept a lower commission on renewals where they are required (assumption here) to maintain a relationship with the client?

Said relationship drives the renewal and possible up- or cross-sell opportunity.

BTW, who manufactures the steak knives? :)

Randall Bolten
Title: CEO
Company: Lucidity
LinkedIn Profile
(CEO, Lucidity) |

I won't go into too much detail here because all the responders so far clearly know their way around a comp plan. But at the 10,000-foot level, you really want to make sure sales people get paid for (a) bringing in paying business and (b) getting the customer to make long-term commitments that are real. These two objectives are not completely in harmony with each other, and sometimes you have to make tough choices.
The important thing is to start with your basic compensation philosophy -- that is, decide generally how much you want to reward (a) and how much you want to reward (b), and then design a comp plan consistent with that philosophy. In other words, strategy first, then tactics.

Anonymous
(EVP & CFO) |

Wayne, lower rate for renewals because it is often easier to renew an existing customer then find and close a new customer. If the rates are the same, reps will gravitate towards renewals rather than selling new business. Been there, done that, won't go back.

Topic Expert
Joan Varrone
Title: CFO
Company: Cloud Cruiser
LinkedIn Profile
(CFO, Cloud Cruiser) |

We are not SaaS but sell software on a subscription basis.

We pay based on amounts invoiced with a special incentive for the sales staff to book multi-year deals as this creates the recurring revenue. We do not bill monthly with the minimum payment of one year up front with discounts given for upfront multi-year payments.

Commission percentages are based on the compensation at risk and quota,

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