Context: Based on Ernest's experience with typical sales deals between $100K-500K USD in a highly consultative sales structure. Based on Ernest's experience with Shapetrace in trying to setup a sales incentive plan for SaaS.
There are a few points in regards to commission structure:
Sales commission structure should abide to KISS ("Keep it simple, stupid").
"It's not revenue until the product is delivered...period".
Payment to salesperson doesn't occur until, 1) after the product is delivered, and 2) when money is received.
Alternatively, company can pay upfront to salesperson with clawback in case the deal gets cancelled (in the example that a 1 year SaaS gets cut short).
Commission rate is a honest balance between management and the salesperson
Top-down revenue: what does the corporation want to achieve?
Bottom-up revenue: how many can a salesperson sell a month?
New Account
Expansive/ Up-sell
Renewal
Consulting
New sales: highest commission (e.g. 9%) on MRR or ACV (upfront payment) to sales employee
Expansive/Upsell sales: same commission or lower (8%) to sales employee: it's about 5X cheaper to do up-sells so the commission rate is lower.
If the goal is to find new customers, then higher commissions should be awarded to new sales. If you want to grow existing accounts, then you can make the commission equal to new accounts.
Example: I ran into a massive problem at Trimble-Applanix where 90% of sales came from existing customers. Since we weren't compensated any differently, we didn't have any incentive to find new customers since existing customers were easier to sell to. In other companies, renewal sales were done by a different role (e.g. partner account executive, customer success), but the original salesperson was still given a smaller commission for the renewal.
Renewal sales: (e.g. 2%) but with bonus? This is for employees only, no agents.
Services :(10%) because of lower margin
Accelerators (110%, 110-125%, 125+%)
2% Bonus to cash upfront sales for 12 months, 4% for 24 months (but with clawback if cancelled)
Sales commission structures should be adjusted depending on the objectives of the company. What is relevant today may not be relevant in the future. Also, as the value of the unit sales increases, the commission amount lowers. At Trimble circa 2010, the sale of a $1M unit by an independent agent provided a 10% commission, but for a $250K unit, it was max 15%. On the other hand, the sales commission for a sales employee was 2% regardless of unit price which ranged from $125K to $1M).
On-Target-Earnings per year (OTE) = Salary + Variable Sales Compensation (A)
Note: OTE is generally split 50/50 between Salary and Sales Compensation
Quota (B):
Commission rate = A/B
Accelerators:
1. Exceed quota (100%-110%): Commission rate x 1.25
2. Exceed quota (110%-125%): Commission rate x 1.5
3. Exceed quota (125%+): Commission rate x 2
A rule of thumb is the quota is 5-6 times the OTE, with high performers meeting 6-8 times the OTE for SaaS products. However, this number varies depending on the industry and type of product.
The cost of a sales team should reflect gross margins of 80% for the company (for SaaS).
Example:
• If your reps can sell 100 accounts at $10K ARR per account, their quota will be $1M. If your OTE is $150K with 50% base Salary and 50% variable (A), your commission will be 7.5% (this would correspond to a quota to OTE of slightly above 6X).
Again, you’ll want to check this against some industry standards. 6-12% is the range that seems most common in The Bridge Group survey. But commissions can vary widely. In our 2015 survey of 305 SaaS companies we found that median commission for inside sales was 8.9% and field sales was 9.5%, but with a wide distribution: 50% were between 7% and 11%.
Initial commission rate as of August 18, 2018 for independent sales agents.
Type Total Commission Rate for Independent Sales Agents paid on MRR*
Commission rate for New Account sale 30%**
Commission rate for Expansive sale 20%
Commission rate for consulting services 10%
*Reminder: Sales commission structures should be adjusted depending on the objectives of the company. What is relevant today may not be relevant in the future. Also, as the value of the unit sales increases, the commission amount lowers. At Trimble circa 2010, the sale of a $1M unit by an agent provided a 10% commission: there was a sliding scale.
**This was generated under the assumption that the agent will be responsible for lead generation and qualification. Otherwise, the typical sales agent commission is 25-30%.
Sale Agent Responsibilities include:
SDR for lead generation and qualification (non-typical and should be an in-house function in future)
AE for closing sales
CS at a limited capacity of maintaining relationships
User testing for product feedback
• Sales commission paid on Monthly Recurring Revenue (MRR) payment at time of customer payment. Sales commission from consulting services are paid by contract payment terms.
• Travel expenses for independent sales agents to be pre-approved by Sales Manager.
• Commission time period: 1 year for new account and expansive sale. Then, it becomes a renewal.
• Agent contract period: renewed annually
Commission rate breakdowns depending on responsibility:
• Sales development representative role for lead generation: 10%
• Account executive role for demand to sales conversion:
New account: 30%
Expansive: 20%
Renewal: 0% (not available to agents)
Consulting: 10%