In high-tech companies, and especially in the software industry, business models are becoming increasingly varied and exotic. Thats especially true in enterprises focused on cloud computing and software-as-a-service (SaaS). Moreover, whether you like it or not, the GAAP rules for revenue accounting are becoming increasingly divorced from the underlying economic reality of the business transactions. In this new world, how should you compensate your sales force? Heres how:
Sales compensation should reward focusing on priorities consistent with the company’s overall interests. Sales people should get paid in full when theyve accomplished everything you’ve asked them to accomplish.
Sounds simple, doesn’t it? Its not, of course, but clearly understanding the meaning of these two statements for your company will make the difference between an enterprise where the sales force is on the same page as its owners, and an AIG (or any of those other companies that paid huge bonuses to sales forces while they were tanking their companies).
Take SaaS transactions, for example. Its not unusual for these transactions to involve prepayments of many months or even years of license fees. The underlying economic reality of these SaaS deals is not so different from that of their older cousins: large up-front license fees with ratable revenue recognition. How to compensate the sales force depends on the company’s objectives. Consider the following relationship characteristics (among others):
- Getting paid full price, with a minimum of discounting
- Signing the customer up for a long-term relationship
- The amount of ongoing hand-holding the customer will need from the sales force (as opposed to the technical support team)
- The importance, if any, of selling the customer additional feature or additional products over time
- The role of resellers or third-party service providers in closing deals and customer satisfaction
- The role you want, or need, your sales reps to have in the collection process
You should first come to understand the relative importance of these factors at your company, and the tradeoffs among them, and then design an effective sales comp plan. These factors will determine commission plan and payment choices like:
- Commissions earned up-front vs. over time
- Commissions earned on booking vs. invoicing vs. revenue recognition
- Commission rates for product (or license) sales vs. maintenance (if any) vs. consulting vs. other services (e.g., training)
- Overlay compensation for channels reps
- Commissions earned vs. commissions paid
- The impact of A/R collections on commission payments
In my last post, I discussed the role that revenue recognition, and the revenue recognition process, had on comp plan design. My central point was that every company is different, and there can be no hard and fast rules. Its no different in this world of new and unusual business models: There are no hard and fast rules. Common sense should prevail.
As always, effective and intelligent sales compensation is an art, not a science.