Q: What is the better SaaS sales compensation plan: paying reps the 12 months up front for the contract value or paying them pro-rated 12 monthly payments?
You may be tempted to pay reps monthly for monthly deals. But it’s not worth it.
Because while it does sort of align interests, run the math … and you’ll see, it’s too hard for them to make any real money this way. It just takes too long to build up a decent commission check.
So my vote is:
- Assuming your churn is fairly low
- Just pay them the commission on all 12 months upfront; and …
- Add a clawback for customers that churn in less than 12 months.
I.e., if the customer cancels in < 12 months, they forfeit a pro-rated amount of their commission (really, this means it’s taken out of future commissions).
And then, incent them with a higher commission for annual prepayments over monthly. That will work well, too.
Finally, don’t sweat the claw-backs. You may lose a few nickels if the rep leaves before you can claw back, but it won’t be much. It’s really just a process check. Clawbacks don’t really amount to all that much money. They just align interests.
And if your churn rate is low enough and NRR high enough, none of this will really matter. If your average customer lasts 12+ months, just pay a full commission on even monthly deals. It will all work itself out, or close enough. And sales reps won’t have to worry about each month getting paid on monthly deals. You won’t have to worry about more accounting work. And life will be simpler.