Building Your SaaS Sales Compensation Plan
[Source: Fred Destin, Accel] Compensating the sales force is a difficult task and the key is usually to keep things simple, so that each sales rep knows what he needs to optimize to make more money at the end of the quarter. For SaaS companies, we found that MRR is the best metric on which to base sales commissions. While it may make sense to offer very slight adjustments for favorable payment terms and one time revenue, net additions to MRR should dominate the sales rep’s thoughts. The reps’ top 3 priorities should be (i) MRR, (ii) MRR, and (iii) MRR.
I had the opportunity to exchange on this topic with Gary Messiana, a BVP Entrepreneur-In-Residence and former VP Sales and CEO of Netli and he shared with me the basic structure he was using at Netli before the company was acquired last year by Akamai. When he initially built the sales compensation plan, he wanted the sales rep to think MRR and the most logical thing to do was to give $1 of commission for $1 of MRR sold. $1 of MRR generates $12 of annual revenue, so $1 commission equals 1/12=8.3% which is very close to the typical 8% paid for sales commissions.
The second thing he did was to define was the ramp up of the commission rate to make sure the best sales rep would get the most upside. To do that, he applied another simple rule:
- For 0-25% of the quota, $0.25 commision per $1 of MRR
- For 25%-50% of the quota, $0.5 per $1 of MRR
- For 50%-75% of the quota, $1.0 per $1 of MRR
- For 75%+ of the quota, $1.5 per $1 of MRR