New SaaS Startup - Help determining best commission structure

To start with: I would only pay commission on cash receipt.

As far as 1 year, month to month or 3 year; it should be based on profit margin. If the margin goes up for a 3 year deal, maybe you pay more (or maybe not).

Make sure you commission agreements stipulate that commissions booked during term of employment are payable when cash is received. Installment sales are based on invoice dates of installment. In other words, if I closed a sale on Monday and left the company on Friday, I would be paid the commission on the associated invoice when it paid.

If it was a 3 year deal payable annually, I would only get the first year.

Sales managers would get an override on all sales (less those where he/she is the salesperson).

Channel compensation could be similar, but X may be lower/higher depending on the cost of maintaining the channel as well as the current market conditions for channel deals in your side of the industry.

For a SaaS based company you should have the sales team focused on building a recurring revenue stream (ARR) and pay them based on incremental ARR and not bookings. If sales team is paid on bookings then they will focus on total bookings and not ARR which tends to drive ARR lower not higher especially on prepaid deals that are multi-year. (which get discounted) The reps can get additional bonus for cash upfront and\or mulit-year deals. (integral part of their comp plan and their variable comp broken out into the different pieces) Also consider having the comp plans structured such that accelerators do not get paid until the annual ARR goal is met. Having compensation paid based on cash receipt from customer is definitely ideal.

I agree that one should set Sales Staff focus on landing deals that keep contributing to SAAS company over a period. I would start by looking at how KPI's are set for the sales department. A SAAS company will most likely be of the opinion that their valuation will follow Metcalfe's law. This means that the company is valued proportional to the number of members ^ 2.
I also consider the profitability per client will increase as more people join as the fixed cost per client will decrease.

With this in mind my opinion is that I would be willing to pay a sales rep more every year/month the client stays on the system. The same holds for clients that pays upfront in cash. The Sales rep would get 0.7*X but if that client renew the second year then the rep would get X and if the client renews for a third year you could get 1.2*X

Advantages of this approach is that it is better aligned with corporate profit, encourages longer employment and improves customer service.

I run a SaaS software business, and I am also the CFO of the parent company. It is a very complicated discussion with many levers. The above answers only scratch the surface. Here is a summary of what we do:

- We have list prices the sales team has some room to negotiate.
- Same commission rate for all length of sales. Reps are incented to sell multi-year deals because there are more commission dollars.
- We pay 100% of the deal commission upon the first quarterly invoice regardless of contract length. This is definitely a tradeoff. However, it keeps the reps hungry to sell more because they are not building a book of future commission payments.
- We charge customers a premium vs. our 3-year price to sign a 2-year, 1-year or MTM contract.
- You are just starting out, and it appears you are going to have the sales reps service who they sell? These are very different skill sets and will take time away from selling new customers and building your revenue base.

I agree with Mr. Hunt's comment. We never pay commissions based on booked revenue. That type of structure is complex to administer and ripe for fraud. In my experience you need to focus your sales staff on higher margin services and good clients. I am the Controller for a large SaaS company and after many years of an overly complex commission structure I had a heart to heart meeting with the Chief Sales Officer and we developed a simple commission structure that pays based on net collected revenue and established quotas focused on selling recurring high margin revenue services. This is so much easier to explain to the sales staff and they know with certainty what to expect in terms of pay. An alternative method is to pay them the commission upfront which is risky but you no longer have a complex tracking method to manage and the reps know they have to keep bringing in business to make money. This is the real estate broker approach as some like to call it.

Avoid paying commissions in perpetuity or it will be a disaster. Incentive your channel partners (if you use any) to sell higher margin services and give them a structured flat rate commission structure that increases in rate as the amount of net collected revenue they bring in rises. This keeps everyone honest and focused on real cash generation for the Company.

I won't go into too much detail here because all the responders so far clearly know their way around a comp plan. But at the 10,000-foot level, you really want to make sure sales people get paid for (a) bringing in paying business and (b) getting the customer to make long-term commitments that are real. These two objectives are not completely in harmony with each other, and sometimes you have to make tough choices.
The important thing is to start with your basic compensation philosophy -- that is, decide generally how much you want to reward (a) and how much you want to reward (b), and then design a comp plan consistent with that philosophy. In other words, strategy first, then tactics.

Wayne, lower rate for renewals because it is often easier to renew an existing customer then find and close a new customer. If the rates are the same, reps will gravitate towards renewals rather than selling new business. Been there, done that, won't go back.