The principle to apply here is that the sales person should be paid at the point at which (1) you can reliably state the value to the company of the sale, and (2) you want the sales person to disengage and move on to the next sales opportunity. For most SaaS models with solid contracts selling to solvent companies, this is following the close of the initial contract (regardless of local revenue recognition laws).
In helping our clients design their sales compensation plans for this model we generally recommend that they credit 100% of first year revenue + a reduced percent of out-year revenue (perhaps 50%) so that the sales person receives 200% of annual revenue credit for a three year contract, for example. Then the sales person is paid their full incentive compensation for the deal soon after the deal closes.
Many companies pay in alignment with cash coming in, or with their local revenue recognition rules. However, over the long run this will have the effect of creating an annuity “tail” which continues to pay the sales person for success in prior years. While some companies believe this creates a retention incentive, it eventually has two serious negative effects: (1) the company ends up concurrently administering multiple compensation plans (one for the current year, one for the prior year to pay on all deals that closed in that year, another for two years ago to pay on those deals, etc.), and the administration becomes expensive and confusing, and (2) the sales person has relatively little risk in their compensation this year based on their performance this year as they are continuing to earn on deals closed in prior years, making them too comfortable with sub-par performance and giving the company leadership less latitude in directing sales effort towards the most important results.
I like the paying in alignment with cash coming in. I know it is nice for the sales rep to have that money coming in from the year prior and to avoid the sales rep being comfortable can’t we make him have to meet his goals like a 5% increase each 3 months?
Tyler, That’s what a lot of companies do, from early stage to later stage – pay when the cash comes in. And that works fine for a few years. But in the long run, your most successful sales people will build up an annuity tail that becomes as much as 2/3 or more of their “variable” pay. This is what leads to the reduced interest in selling new accounts, and less risk and upside based on current period performance. If it’s an account management role, then that works. If it’s primarily a new business role, it probably breaks down in a few years (if you are growing and have successful sales people who stay with you for years). The requirement that they grow could be a great way to keep them focused on new in the early stages. But in the long run, if you want them focused on new, pay for new. That’s my perspective, though I’m sure there are others.
Would love to hear from others who may have had this model in place successfully for years, or who have moved away from it.