Sales Compensation: Tips From The Experts

What's Your Compensation Plan?

There's all kinds of advice, models and formulas out there for paying sales representatives to sell Software-as-a-Service applications, cloud services and managed services. Experts don't necessarily agree on every point, one example being whether to pay sales representatives on a regular (monthly or quarterly basis) or pay compensation when the customer's payment is received.

There's no one best way to do it -- a lot hinges on a company's culture and objectives.

Here are some ideas and advice from people who have dealt with these questions, which a growing number of solution provider executives find themselves wrestling with today.

Keep It Simple, Sales Manager

1. Compensation can be based on annual recurring revenue or annual contract value. Other possible measures are total contract value, deal count, cash-in and/or specific product-based incentives.

2. Keep measures simple and based on data that sales representatives have direct access to and is 100 percent transparent.

3. Pay incentives monthly or quarterly, but reporting must be frequent and transparent.

4. Establish a clear process for resolving questions and disputes.

Source: "Sales Compensation And Incentive Plan Principles For Enterprise SaaS And Cloud Teams," blog by Jeff Saling

Elephant Hunting Vs. Consistent Production

Most solution providers would prefer their sales reps bring in a steady flow of business rather than a few big deals at the end of the quarter or year. Here's some ideas about incentives to help:

1. Pay a quarterly bonus for meeting minimum sales volumes, typically 15 percent to 20 percent of annual quota.

2. The quarterly quota bonuses, if earned at 100 percent for the year, should represent 25 percent to 33 percent of the total variable incentive payout.

3. If the quarterly minimum is not met, half of the quarterly quota bonus is forfeited, with the balance rolling forward.

Source: "Sales Compensation And Incentive Plan Principles For Enterprise SaaS And Cloud Teams," blog by Jeff Saling

Deal Of A Lifetime

1. The primary principle of sales compensation is to pay the sales representative in proportion to the value of the deal, traditionally measured by a product price.

2. When calculating sales compensation for a cloud service, take the sales commission model you are using and replace the product price with monthly, quarterly or annually recurring revenue.

3. Sales compensation for Software-as-a-Service should be based on the lifetime value of a deal.

4. Sales compensation should be paid up front.

Source: Blog by Joel York at Chaotic-Flow.com

SaaS Sales Compensation Model For Inside Sales Reps

1. Suggested split of 40 percent salary and 60 percent commissions.

2. Commission is equal to 10 percent to 20 percent of a SaaS contract's first-year revenue.

3. Commissions are paid out after the customer's payment is received.

Source: "David Cummings On Startups," blog at www.davidcummings.org