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Compensating Cloud Salespeople

Many SaaS vendors will have a hybrid model of direct and indirect sales, which makes it
important to structure a sales compensation plan that will reward their salespeople for producing
the right results. For ISVs that sell purely through channels, knowing how your partners
compensate their salespeople will provide a good filter to determine which partners have
developed a viable approach to selling cloud-based solutions.
There are a number of factors that make compensation plans more complicated for cloud
solutions than on-premise. When on-premise perpetual license is sold, the entire license fee is
collected up-front, and the salesperson is paid a commission, typically 8% of revenues. With a
subscription model the payments are usually made monthly or quarterly, and the amount can
vary based on the number of users, or the resources that are consumed if it is a utility model.
This section will discuss the key elements of the compensation structure.
How do you define the contract value?
Commission structures should reflect the value of a revenue stream to the vendor, and there are
three definitions based on how revenues are collected:
1. The foundation for most compensation plans is Monthly Recurring Revenues (MRR),
and there are many SaaS companies that will only look at MRR as the basis for
commissions. While this an important metric used to measure a company’s growth,
salespeople do not get excited by a commission based on x number of users at y$ per
month, so a model should be developed that generates the commission up-front.
2. Annual Contract Value (ACV) can be used for annual subscriptions, paying the sales
person one rate for the first year, and lower rates for renewals;
3. Total Contract Value (TCV) can be used when a client pays for multiple years up-front.
For some companies it is worthwhile offering customers a discount for a three-year
contract paid with the contract signing. By generating the cash up-front the cash flow
resembles an on-premise model more than a subscription model, but the discount has to
be measured against the cost of capital. In other words, what does the discount
translate into as an annual cost of capital, and how does that compare to other forms of
financing.
Sample compensation plans

MRR (Monthly Recurring Revenues) - A simple formula for monthly subscriptions is to
pay the salesperson 100% of the first month subscription fee – 1/12 of the annual
contract value is 8.3%, or roughly the standard commission for software sales;

paying 100% of the commission for a one-year paid subscription. the price of the subscription. Multipliers will normally range from 5x to 8x OTE. The multiplier determines the annual quota. TCV (Total Contract Value) – if you collect a three-year contract up-front. and 2) reward salespeople for subscriptions that are successfully renewed through the first year. the salesperson will expect to receive a full commission on the entire amount. However. it makes commission tracking more complicated. for example $100K. This keeps the salesperson engaged to help with renewals. This formula starts with the compensation (base + commission) that a salesperson should get for hitting their target. and commissions based on 80% of TCV for a two-year term when it is paid up-front (effectively. it can be tempting to stagger the commission payment. First. etc. Setting Quotas A common formula for setting a quota is to use a multiplier of On-Target-Earning (OTE). An ISV would adjust the multiplier based on the maturity of the company. the up-front payment is more of a financial decision made jointly by a vendor and the customer. the salesperson shouldn’t be held responsible for the quality of the product. This is done to 1) better match the commissions paid with the cash received. Second. 160% of the commission paid for a one-year term). say 8% of the ACV. so that the salesperson gets 50% of the commission at the start of a subscription and the remainder at the end of the first year. ACV (Annual Contract Value) – break the commission into a “hunting” component and a  “farming” component. Third. and reducing the immediate reward for a “hunter” will be a disincentive for many salespeople. the quality of the lead generation programs. and is not directly attributable to the salesperson.6% of the original commission). as he would if he were selling an on-premise license. This can be counter-productive. so a multiplier of 6x OTE results in a quota of $600K. most of which have nothing to do with the salesperson (unless they have been setting unreasonable expectations). the market they are selling into. Deferred Commissions When contracts and billing are month-to-month or quarterly. . and renewals would produce 20% of that (1. and 60% of TCV for a three year contract. for example. The initial sale would produce a full commission. salespeople should be focused on adding new accounts and helping build MRR. Customers elect not to renew for many different reasons. the product. One option would be to assign a lower value to the extended term. and perhaps most important.

$0.Fine-Tuning the Commission Structure Based on Performance It can sometimes make sense adjust the commission to encourage a faster ramp-up. $1. if the quota is $400K.25 . This can be accomplished by applying a simple rule:     For 0-25% of the quota. if the annual quota is $400K. etc. 50% of their standard commission when they have achieved 25% of the annual quota.5 per $1 of MRR For 50%-75% of the quota. In order to motivate a salesperson to make a consistent effort. the sooner they get 150% of the standard commission. The sooner they get to 75% of their quota. For 25%-50% of the quota. Another way to adjust the commission for performance is to measure the year-to-date performance.0 per $1 of MRR For 75%+ of the quota. a salesperson would get 25% of the normal commission rate for the first $100K in revenues.$0. the commission can be set at a lower rate if they are running at less than 70% of the annualized quota. the commission could be $0.5 per $1 of MRR.25 commission per $1 of MRR. $1. . If they are below that.5 per $1 of MRR By way of example. they would have to be at $70K at the end of the first quarter to get a commission equal to $1 of MRR. $0. For example.