SaaS Blogs

On many occasions, I’ve heard people discuss the issues regarding compensation strategy for a SaaS sales team. The one thing I rarely hear, however, is either how folks are dealing with it in the real world or proposals/frameworks that attempt to solve many of the sales compensation problems. My goal with this post is to provide a “rough draft” framework for compensation and to provide a sounding board for SaaS Blogs readers so we can use our collective brains to discuss potential solutions. Before jumping into the post, let’s recap the issues with compensating your SaaS sales team:

1. Tradition - Sales teams are accustomed to large commissions associated with the large license fees tacked on to on-premise software. This creates significant incentive to sell, sell, sell! SaaS, however, takes an “amortized approach” to the traditional lump sum revenue. This puts the company in a position where giving a life time value or term value commission is at odds with the companies sales position since the funds from the sale have not been realized and/or collected at the time of commission payout. This can cause negative cash flow, force underfunding of growth initiatives, and a slew of other issues.
2. Disincentivization via Annuities - If an ISV decides to avoid the cash-flow problems associated with the paying out of commission on contract or lifetime value, they generally try to do so via an annuity approach to commission. Although this aligns with the corporate revenue cycle and cash position, it tends to do a poor job at providing incentive. Furthermore, a successful sales person may focus strictly on account management of existing clients since commission is paid out in annuities and keeping existing customers happy (and collecting the ongoing annuity payment) is easier than landing new customers.
3. New Job Role - Unless your organization separates the function of account manager from sales, odds are your sales people will also serve as account managers, which might be a new concept to your sales folks but also justifies continuing to payout commissions even after discrete sale events. Sales teams are responsible for keeping your existing customers happy since, as an ISV, you must now provide them recurring value for their recurring money, and part of that value comes from their relationship with you.

We can definitely find many more issues to deal with, but tackling just this set is challenge enough. An idea I’ve been tossing around is assigning “age” to generated SaaS revenue, where a salesperson receives the highest % commission at the beginning of a contract and that as the revenue stream becomes older, the % commission drops.

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The early commission could be pegged large enough to give significant new customer acquisition incentive, but low enough to not create a negative cash flow situation. At the tail end, commission can drop significantly but remain part of the salesperson’s overall compensation, incentivizing long term account management commitment with “base farming” offset by the bloated commission associated with new customer acquisition.

I think something like this might help out, although I’ve never put it into practice. I’m curious as to how people feel about it, and if anyone has used any other compensation mechanisms that either worked or didn’t, so please chime in!