SaaS companies typically operate on a subscription model, which makes their sales cycle more intricate compared to traditional tech companies. Consequently, designing a compensation plan for SaaS sales requires careful consideration of various options, weighing their advantages and disadvantages, selecting the most suitable plan, and establishing clear objectives to attract and retain the best sales professionals.
Now, let's explore the core principles of a SaaS sales compensation plan and how to structure it in a way that effectively aligns with business goals.
What is a SaaS sales compensation plan?
Creating a sales compensation plan for SaaS companies is not a simple task. You cannot simply replicate one from any Fortune 500 enterprise. If you believe otherwise, you are mistaken.
It can swiftly turn into a disaster.
Every company has its own distinct goals, products, and sales strategies. Take, for example, a SaaS company specializing in high-end enterprise software and another company offering low-cost software products. These two businesses cater to different target audiences, and as a result, what works for one may not work for the other. This highlights the importance of tailoring the SaaS sales compensation plan to align with your specific objectives and clientele.
Three popular SaaS sales compensation plans!
Designing a program based on your business objectives is possible. Here are the top three SaaS sales compensation plans that industry leaders follow. You can take inspiration from these plans.
- On-target earnings
On-Target Earnings (OTE) is a compensation plan that cleverly blends a fixed base salary with a flexible variable pay, often consisting of sale commissions and bonuses. The main objective behind implementing an OTE compensation plan is to ensure that the sales team comprehends their potential earnings while also motivating them to reach their sales targets.
This particular plan has gained significant popularity due to its ability to help identify and retain the most talented sales representatives. By offering an OTE that surpasses the industry average to a high-performing sales rep, you significantly reduce the chances of them leaving their current position for a SaaS company that offers a lower OTE.
- Sets expectations: An OTE compensation plan motivates the reps to work harder and sell more by providing a clear financial sales incentive for achieving the set sales targets.
- Increases Job Satisfaction: When salespeople see the direct correlation between their efforts and earnings, they are more satisfied with their work.
- Attracts Top Talent: OTE plans can attract top performers looking for opportunities to earn significant compensation based on their performance.
- Short-term Focus: The team may focus too much on achieving short-term sales targets at the expense of building long-term customer relationships that ultimately affect revenue in the long run.
- Can be complex to calculate: OTE plans require you to track all sales commissions your reps are achieving and may involve calculating for multiple quotas.
- Straight commission plan
This SaaS sales compensation strategy pays sales reps solely on how much revenue they generate. It does not offer a base salary and gives the freedom to your team to earn as much as they want. The commission structure can vary depending on the organization. It is typically based on a percentage of the sales or revenue generated.
- Potential for high earnings: Performers can earn significant commissions with this structure. They can reap the rewards of their hard work and sales skills, leading to higher motivation and overall income than fixed salary structures.
- Cost-effective for employers: Employers using a straight commission plan only pay out compensation, making it cost-effective when the company has a huge sales force. It helps align expenses with revenue and can be advantageous during slow sales or economic downturns.
- Recruitment and retention Challenges: The plan may not be attractive to everyone, especially those who prefer a stable income or have financial commitments. Employers can find it challenging to attract top performers who want consistent paychecks.
- Compromising customer satisfaction: Sometimes, the pressure to earn high commissions may lead to aggressive or deceptive sales tactics. Employees may prioritize closing deals over the customer’s interests which can harm long-term customer relationships and the organization's reputation.
- Incentive-based compensation plan
Incentive-based compensation plans provide salespeople with extra financial rewards on top of their base salary when they surpass their assigned quotas or make significant contributions to their team's success.
Unlike commissions and bonuses, incentives are designed to be more motivational rather than solely outcome-based. By offering meaningful sales incentives, you can greatly influence the behavior of your team.
Here are the top three ways you can structure your incentive compensation plan:
- Annual incentives: These are lump-sum payments provided annually in addition to the base salary of your sales rep based on their performance and achievements over a specific fiscal year.
- Gain sharing plan: This compensation model offers financial and non-financial rewards to outperforming employees. These rewards include company shares, stock options, bonuses, and more.
- Long-Term Incentives: You can design this plan to reward employees for sustained performance and loyalty to the organization over an extended period. Incentives can include equity-based compensation, awards, cash rewards, and more.
- Flexibility: You can tailor the compensation plan to different roles or levels to cater to individual needs. This flexibility ensures that incentives are meaningful and relevant.
- Encouraging loyalty: Since these plans incentivize long-term employees and those who contribute to teamwork, they can help companies retain their star performers.
- Earning limitations: Most incentive programs offer lump sum benefits that put a cap on earning potential of your sales teams. So over time, your top-performing sales rep can feel demotivated.
- Potential misalignment with customer success: SaaS companies often emphasize customer success and long-term value generation. However, incentive sales plans primarily focusing on new customer acquisition or initial contract value may not align well with these objectives.
Top tips for structuring the perfect SaaS sales compensation plan
Here are industry best practices to help you shape your SaaS sales compensation plan and hit the targets.
- Align your compensation plan with your business objectives!
For most SaaS businesses, this is easier said than done. To help you make an informed decision, here are some complex questions you need to answer:
- What are the primary and secondary business objectives you will set for your team?
- What sales compensation fits best with your revenue target?
- Is your team going to be satisfied with the benefits they receive?
- Which metrics are you going to use to measure your team’s performance?
Some of the primary goals may include increasing revenue and cashflows and establishing long-term customer contracts. On the flip side, secondary business goals include accelerating customer satisfaction rates and optimizing the sales process.
Based on the questions above, analyze which compensation plan aligns with your business goals. You can also create a plan that mixes different components for better flexibility.
- Create separate plans for employees at different levels
The incentive plan that motivates your sales representatives may not motivate the regional sales head of your organization. Structuring a sales compensation plan for employees at every hierarchical level is crucial for retaining your top sales performers.
Conduct surveys, have one-on-one discussions, monitor feedback and evaluate metrics to understand what motivates your employees, and design and communicate the details of your compensation plan to maintain fairness and transparency.
- Allow clawbacks
Clawback provisions are important to include in your compensation plan because they safeguard your interests. These provisions indicate that money already paid out by the employer must be returned under special consequences.
For instance, if you have invested thousands in employee training, hiring, and compensation, and if the employee opts to leave the firm or uses deceitful sales techniques, you can ask back their commissions.
Think about your past experiences and perform research to add clawback provisions to encourage sales reps to work ethically.
SaaS sales compensation plans are not perfect- Keep optimizing!
Lastly, we'd like to offer some valuable advice: keep iterating and strive to find the right balance. Keeping everyone satisfied can indeed be a daunting task, but don't be discouraged. Through experimentation, you'll discover what strategies work best for your team.
Moreover, if you're interested in staying informed about the latest trends and creating engaging user experiences, we invite you to continue reading our blog. Our blog is a treasure trove of insights that have the potential to revolutionize your growth model.
Additionally, we provide end-to-end consulting services designed to assist emerging SaaS businesses in streamlining their delivery pipelines and enhancing customer retention rates.