How often should sales people be paid?

Generally speaking it's a good idea to align the payout frequency with the length of the sales cycle. If sales cycles are under a month, monthly payouts should be considered.

If sales cycles are 1 to 3 months, then consider a quarterly payout. For sales cycles of 3 to 12 months you should probably consider an annual plan paid quarterly based on year to date performance.

If sales cycles are longer than 12 months you can get into a trickier situation. If a typical sales person closes many deals per year, even though the sales cycle is long you might use a quarterly year-to-date payout as well. However, if the sales cycle is very long (> 12 months) and if there are few deals per year (less than 10 or so), you may need to consider other options. Here are two:

(1) A more base-rich pay mix with a "kill bonus" approach: The sales person has a base pay that is close to their market value, and receives a handsome "bonus" payout upon closing one of those large deals - either a small percent of the deal value (commission) or a fixed amount per deal (bonus), depending on how much influence they have over deal value. If they strongly influence deal size or deal value (margin), then a percent of the margin expected from the deal can be a good measure. If not, a fixed bonus may be a better approach. This is most appropriate for large deal “hunter” roles.

(2) A commission on revenue or margin payable as the revenue is recognized: This will be paid out over the first year, first two or three years, or the “life” of the deal. This will have the effect of creating an annuity stream for the future, will help to retain good talent, and may make it less appropriate to continue to pay that high base once a few deals are landed. This is appropriate for sales roles in which an ongoing account management (“farming”) emphasis is expected. If this is your situation you should consider the early-on high base as more of a non-recoverable draw against earnings which will disappear after the first 18 to 24 months in the job.

Should the cost of customizing our product be deducted from sales credit?

Regarding the cost of customization, now you are talking about paying on the margin of the deal, not the revenue value. That's fine too - but would probably result in a higher commission rate. If you can accurately predict the margin value of the deal, it is an even better measure of the value created by the sales person. Many companies avoid this, however, because it results in hair-raising accounting at a contract level and lot of discussion and argument that can actually cut into your sales capacity. But if you can do this in a straight forward way, it is a great way to measure sales people.

What is the difference between revenue, bookings and sales credit?

REVENUE is what you report for tax purposes based on the local applicable accounting rules.

BOOKINGS is also often reported to Wall Street quarterly for software companies and is a great leading indicator of their financial health. For our example above, this would be $500k reported in the month in which the deal was signed.

SALES CREDIT is whatever you use to measure your sales people. While it is most often tied closely to bookings, it is also common to credit the sales people only when revenue is recognized, or to provide credit based on the margin generated. You could also split credit among members of the selling team. This piece is totally up to you and is part of your comp plan design.

What's a good formula for a commission plan based on obtaining orders?

So you want to implement a commission based acquisition system, based on obtaining orders/circulations of products/consumer goods in bulk.

Here are some suggestions about when a particular commission plan might be most beneficial:

A percentage of the first order/circulation

Use when:

• The sales person influences the size of the first order, and a larger first order is both strongly desirable and indicative of the long-term value of the new customer relationship
• There is a fulfillment/retention channel separate from the new customer sales channel that is responsible for ensuring re-ordering and growth of the account. This could be a call center or a self-service online capability, for example. In this case, the sales person's job is to get that first order, acquire new accounts - and another part of the organization takes it from there.

A percentage of each order/circulation

Use when:

• The sales person is responsible for the first sale, the ongoing relationship, the growth of the account, or
• A team of sales people are working to take in as much transactional (not relationship-based) business as possible, and different people may sell to a given account at different times - for example, a call center with calls routed based on language or simply availability.

A fixed sum for the first order/circulation

Use when:

• The first order generally results is a satisfied customer and repeat business
• The first order may be sold at a significant discount
• The sales person has little influence over the size of the order
• Any first order, regardless of size, takes about the same amount of work.

A fixed sum for each order/circulation

Use when:

• The sales person has ongoing responsibility for processing orders/ transactions as quickly and efficiently as possible
• All orders have about the same value (profit) to the company
• The sales person has little influence over the size of an order.

By far, the most common sales incentive design is based on a percentage of each order. However, depending on the way you have designed your selling model, there may be good reason to measure and reward in one of the other three ways you mention.

How should sales be credited for SaaS sales?

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.