Compensating Your SaaS Sales Team
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:
- 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.
- 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.
- 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.
(bigger)
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!
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You are right, that the compensations of sales people, paid “in advance”, are one of the main inhibitors of SaaS performance. We start to provide budget base services to medium sized market and are planning to outsource main sales work to a call-centre. As to your model – it does work if only you intensify per people workload )). Your salesperson just doesn’t have time for account management if she performs well, so she can’t be paid for that.
Alex,
Good point. I suppose offloading all account management to the closing sales rep won’t scale and could severely bog the salesperson down. I wonder if a “hand off” to dedicate amount managers is appropriate after enough time has passed such that appropriate commission was collected, but not long enough to allow too many account management duties to pile up would work.
Sinclair,
I manage the Enterprise Sales Team at HireRight, a SaaS background screening solution that’s integrated with other SaaS plays (Taleo, Successfactors, and others). As you pointed out, traditional software sales leaders receive a large commission at the time revenue is realized. SaaS sales leaders, on the other hand, receive smaller annuity like payments over a period of time (also when revenue is realized). In our environment we, pay a bounty to sign a deal and then a higher rate on revenue over the course of 15 months (with a couple of extra months built in to account for implementation time and the time value of money). Additionally, during the first couple of months of this 15 month payment cycle there is a methodical hand-off from sales to account management. The sales team is then freed up to bring in more meat for the tribe and the account managers butcher it and prepare it for consumption. The model is working very well for us and we’re able to attract tip-top sales leaders (and earners) with the plan, among many other things.
Because the plan requires ramp up time to meet a reasonable OTE for top sales leaders we vet talent rigorously and, once they are selected, invest heavily in them through non recoverable draws–which makes them whole for the first year (as they build their annuity).
In sum, I could not agree more with you in that you certainly would not want your best hunters back in the village tending the flock.
Great topic! There is a SaaS sales group on LinkedIn (Enterprise On-Demand Software Sales (SaaS)). Please join if you would like….
Sincerely, Marc
Sinclair,
This is a great topic. I agree that assigning an age to the commission formula can motivate salespeople. We are currently in the process of creating such a commission structure. On top of the initial commission, we were thinking of having monthly commissions paid for 12 months following the close of the sale. We were also thinking of adding another 6 months as long as the account has appreciated in value.
-A
This is a great question. I would argue that once a sale is made, the value of a customer increases with the amount of data they store with you. The reason is because it is a lot harder to leave your service if you hold a ton of their business data.
So…there is value in closing the sale, and there is value in keeping a customer, and there is value in increasing the amount of data that you hold from a customer.
Based on that, I would go with a flat commission as a percentage of monthly revenues. The sales guy now has to acquire the customer, retain the customer, and help the customer use the SaaS application effectively. These things are all in the best interests of the company.
If a sales guy morphs into an account manager, that is not a bad thing either. The traditional separation of sales and account management is driven by the big payment up front and the much smaller “maintenance” fees. The best part about this flat percentage compensation model is that the sales person is motivated to maximize subscription revenues, which is in full agreement with corporate goals.
The most critical element in sales compensation, missed by many who design comp plans, is the alignment of corporate goals with sales behavior. How you pay should depend on your access to capital and the behavior you want from your sales team. When the alignment to corporate goals is not great, you get entry into markets by sales accident, long sales cycles, poor close rates and high support costs. You also want the pay event to be as closes as possible to the booking event.
I have been on both sides of the comp plan & role spectrum. Depends slightly on the product but, a salesman should ‘own’ his/her accounts before and after the sale. (Comp plan reasons aside for a moment) If I’m a customer and the guy I trusted to give my money to is dissapearing after the contract is signed, I don’t get a good feeling about that. The next time I hear from “My Sales Rep”, it’ll probably only be when I need to buy something or he needs a good reference from me, to help him close another sale. (FAIL).. Rather than doing a ‘handoff’ to an inside sales/account rep after the sale so, I can go back to ‘hunting’.. Better to hand off a qualified lead/opportunity from a business development rep so, I can spend more time developing rapport, closing deals and leveraging my relationships to shorten sales cycles and get better quality contracts.
That said.. a comp structure that would be best (in the world according to me) would be to have the hockey stick shaped comp plan with percentages values determined by contract length. Example Q1 pay for a 12 month contract 35%, 40% if 24 month contract, 50% if 36 month contract, etc. Q2 and subsequent Qs commission on that account would quickly ratchet down but, not dissapear.
No Dissincentive here. If you do an exceptional job at account management by bringing value to your clients, more sales will always follow. Hunters need not apply here, as the law of attraction takes its course. A slow/methotical hand off, (case by case) makes much more sense; similar to Marc M’s comment.
Hunters, hunt and closers close. So, let it be.
Outstanding topic. My company is adding more and more Saas offerings to our software portfolio. The current model is to assume a retention factor and compensate sales people up front as we work to build retention reporting. The challenge we are faced with is understanding where a sales person’s influence ends and Saas product delivering on the value proposition begins. If feels like there is concensus on this blog that up front payment without retention as a factor can be problematic and doesn’t make economic sense (pay commission, before collecting revenue that may not show up as assumed).