Incentive Compensation

2024’s Definitive Guide to Software Sales Commissions

Adithya Krishnaswamy

min read

Picture this: You’re addressing your sales reps, and you’re about to break it to them that the management has decided to cut down commissions for the next quarter. Trust me, that’s not going to go down well.

‘My Indo Airlines’ is a perfect example of why slashing commissions is never a good idea. This Indonesian airline decided to cut back on the travel agents’ commissions. The result? Their sales tanked across different regions.

There’s no way around it—sales commissions are where hard work meets big rewards. Commissions are a must to incentivize your top performers and to get the rest of the team to buckle up and go for the win.

Talking about going for the win, Software as a Service (SaaS) companies are crushing it out there. Salesforce has recorded an annual revenue of USD 31 billion in the current fiscal year. With the competition in the SaaS industry getting fierce, you need to keep your sales representatives on the go with tailored sales commission structures.

That said, commission structures for SaaS companies are different, given their recurring revenue or subscription payment models. Setting up the right software sales commission plan is crucial to create an alignment between your business goals and your sales reps.

It comes with its own challenges, but we’re here to get you started on the right foot. In this article, you will learn:

How typical SaaS commission plans are structured
How to overcome challenges in setting up SaaS commission plans
The standard SaaS commission rates across roles
Tips for choosing the right SaaS sales commission plan

We will also be throwing in a few best practices and examples to help you get off the ground and create your own SaaS sales commission structure like a pro. Dive in!

Why do SaaS companies require tailored sales commission plans?

In the world of SaaS—deals are closed one subscription at a time. Let’s not forget that a typical SaaS sales cycle is a long, drawn-out, intricate affair. It can go up to an average of 83 days for a B2B SaaS company.‍

But that’s the thing. For SaaS sales teams, it doesn’t end with getting a new customer on board. The real catch is retention, where they need to retain the customer over the years. This brings us to the point that there exists a stark difference between building sales commission structures for one-off purchases and SaaS companies that run on recurring revenue models.

SaaS companies charge their users a fee for accessing their products or services. Generally, they bill their customers using—monthly, quarterly, or annual pricing plans. Commissions are incentives provided to sales representatives so they don’t just coast after doing the bare minimum.

In most cases, SaaS sales reps that bring in a sale are paid a percentage of the deal size as a commission. At times, the SaaS sales commission model is recurring. This means the sales reps are rewarded for customer retention. They are paid a commission every time their referred customer renews their subscription.

So how do you arrive at an appropriate sales commission structure that works best for your SaaS sales leaders and reps? We have worked out some structures that will give you the perfect leverage to drive sales performance. But first, let’s break down the elements of SaaS sales commission plans.

Key elements of a SaaS sales commission model

Selling is not getting any easier.‍

61% of sales reps are of the opinion that selling is much harder than five years ago.

To get your SaaS sales representatives to outsell the competition and take your business to new heights, you need to find the best ways to recognize and reward them for their performance.

Let’s quickly run by the components of software sales commission plans.

Base Salary

We will start with the base salary, which is the fixed monthly or yearly pay that your sales reps earn. Now bear in mind that base salary is the amount your sales reps receive before they hit their sales targets. While there are companies that may not offer base pay, sales reps often prefer having the security of a base salary to fall back on. It’s important to understand that the compensation model for your sales reps depends on the band they belong to. Employees are bucketed into bands such as entry-level, mid-level, senior, or executive-level based on the years of experience they have in the industry. In other words—highly skilled, star sales reps often warrant a higher salary band.

According to HubSpot, a SaaS sales rep draws an average annual base salary of $68,705.

Variable pay or commission

The primary element of a software sales compensation model is variable pay or commission. This is the additional amount that the sales rep earns on top of their base pay. The commission is often calculated as a percentage of the deal amount, and for SaaS companies, the standard commission rate is 10%.‍

So when your sales rep closes a deal worth $2,000, they can take home $200 worth of commissions.

On-target earnings

Up next, we have ‘On-Target Earnings’ (OTE). It is the expected amount of money that a sales rep will earn on meeting 100% of the sales quota assigned to them. The OTE includes the base salary plus the commissions earned on 100% quota attainment. OTEs are yearly figures and an ideal blend between the base salary and the variable pay. It’s a great model to attract and retain top talent and is often used by companies to motivate their employees to go the extra mile.

‍For instance, if you offer a base pay of $40,000 and your sales rep earns a commission of $40,000, then their OTE would be $80,000.‍

What’s interesting is the quota that your sales reps need to attain to earn their sales commission is usually 4x-6x of OTE. Sales quotas that are 6x-8x of OTE are considered to be high performing.

Bonus

Every team has outstanding performers. A bonus is what you give sales reps that go above and beyond the quotas set for them. Bonus is calculated as a percentage or a fixed amount. They are different from the commission and are not always factored into a SaaS sales compensation model.‍

For example, your B2B SaaS company can offer a cash bonus of $1,000 to any sales rep who manages to close a deal with one of the target logos that you have wanted to add to your clientele.

Non-Cash Rewards

Cash incentives are great. However, of late, non-cash rewards have been all the rage. Reports from the Incentive Federation Inc. (IFI) confirm that the total amount spent on non-cash incentives is $176.16 billion, up from just over $90 billion in 2016. ‍

From all-expenses-paid international trips to tech gadgets and free tickets to sales conferences, you can get really creative with non-cash rewards.‍

The goal is to ensure your SaaS sales commissions are compelling, pushing your employees to crush revenue targets.

The most common SaaS commission structures

How does it work?‍

A customer acquired by Sally agrees to pay $5,000 a month for the services subscribed by them. Sally will earn a 2% commission on $5,000, which comes up to $100 a month, for as long as the account remains active.

Major challenges faced in setting up SaaS commission plans

Now that we have worked our way through popular SaaS commission plans—let’s take a closer look at the complexities that may arise in setting up these commission plans.

The Complexity of the Sales Process

SaaS sales processes are not just long; they are complicated when compared to traditional processes. For instance, SaaS companies typically roll out contracts that operate on a month-on-month basis. This is where the uncertainty factor sets in. Let’s say you’ve just got a new customer to subscribe to your SaaS service. Two months down the line, they decide to switch over to your competitor. In this case, there is no way you can guarantee revenue from a customer beyond a month. Besides, if there are multiple hand-offs across different stages of the sales process, it becomes all the more challenging to attribute commissions accurately.

Evolving Business Models

New business models often introduce a change in business objectives and revenue recognition methods. Apart from business goals, SaaS sales compensation plans are also designed based on a host of factors, such as customer acquisition costs, churn rate, and the company’s annual targets—all of which change with the arrival of new business models. For sales reps, it’s hard to keep track of all the resulting on-the-fly changes in the compensation structures, let alone ace them.

Pricing and packaging complexities

SaaS companies offer different pricing models, from subscription-based to bundled offerings and usage-based pricing plans. Determining commission on these intricate pricing models is quite a daunting task. Moreover, with a growing range of packaging options, from add-ons to modules and feature sets—aligning SaaS commission plans to different packing options at varying price points can be a significant challenge for SaaS sales teams.

International Considerations

SaaS companies that are dealing with international markets don’t have it easy. While fluctuations in currency exchange rates can be a hassle in ensuring fair commission payouts, they also need to comply with varying legal and regulatory frameworks surrounding software sales commission plans.

Communication and Transparency

Given how intricate SaaS sales compensation plans are, communicating the multiple components of the plan to sales reps can be quite an uphill task. If that wasn’t an ordeal, keeping up with new sales targets and ensuring complete transparency in the usage of metrics and commission calculations only makes matters worse for SaaS sales teams.

Balancing customer acquisition and retention

Striking the perfect balance between short-term revenue goals and long-term customer value is essential for businesses. For SaaS companies, finding the desired balance between incentivizing customer acquisition and encouraging customer retention comes with its own challenges. Designing a sales commission plan that effectively rewards both aspects can be tricky as they can vary from one company to another, depending on the growth stage and other market dynamics. Additionally, the different revenue streams associated with new sales versus recurring revenue only make commission calculations more complex.

Scalability and Growth

SaaS companies are on a hypergrowth track. Their fast-growing sales teams are dealing with rising sales volumes and revenue targets, all of which increase the complexities in SaaS sales commission calculations. Your sales commission plans need to be scalable, easy to administer, and able to accommodate growing sales volumes and changing team structures. Ensuring sales commission plans stay in lockstep with the skyrocketing growth of SaaS companies is easier said than done.

Data Accuracy and Integration

The calculations of SaaS sales commissions depend on the availability of accurate, reliable, and real-time (or near-real-time) data. This includes sales data, customer details, and revenue figures. Companies rely on multiple sources, legacy systems, and manual processes to fetch this data. Against this backdrop, ensuring data accuracy and maintaining consistency across various systems (CRM, billing, and commission calculation tools) can be a herculean task.

Best practices in setting up SaaS commission plans

Whether you are from operations, finance, or sales—if you’re in charge of commission calculations but are unsure where to begin, we’ve got you covered.

Here are eight best practices to set you off in the right direction:

Align with business objectives

What are the top goals for your business? How do you want your sales reps to achieve them? You need to align your sales commission structures to the overarching business objectives and sales strategies. Establish commission structures that incentivize behaviors and outcomes that help you meet your end goals. These could be goals around customer acquisitions, up-selling, cross-selling, customer retention, or a perfect combination of these revenue growth strategies.

Clearly define commission structure and calculation methodology

Designing a fair and transparent commission structure fosters a sense of purpose among sales reps. Make it a point to clearly outline the commission structure, calculation methodologies, payment schedule, eligibility criteria, and any other rules or contract terms, such as clawback provisions. Be transparent about the commission calculations and ensure that they are easy to understand, leaving no room for ambiguity or misinterpretation.

Regularly review and adjust

Your job doesn't end with setting the commission structure for SaaS sales. You need to regularly review and gauge the effectiveness of your sales commission structure. It's also essential to monitor its impact on the sales team's motivation and performance, as well as the company's revenue growth. Be sure to check back with your sales teams for feedback. Modify the commission plans based on feedback and data-driven insights and benchmark them against industry-wide commission percentages.

Balance short-term and long-term goals‍

In the SaaS industry, sales reps will have to strike a balance between short-term revenue generation targets and long-term customer success and profitability goals. Ensure your sales reps are fairly compensated by choosing appropriate pay structures and commission percentages for these different goals. Incorporate metrics and incentives that not only motivate them to close deals but also encourage them to strengthen customer relationships and drive greater customer satisfaction.

Provide clarity on performance metrics

Clearly communicate the performance metrics that will determine the sales commission payouts. The key is being transparent with your reps on how you track sales performance. Ensure that your sales reps know how their performance is evaluated and which activities or outcomes will contribute to their commission earnings. This level of clarity is crucial for sales reps to focus on the right activities and align better with the management's expectations.

Offer regular training and support

Regular training and support must be provided to sales representatives. This will help them understand the commission structures better and, in turn, find ways to maximize their earnings. In addition to training, sales reps need to be equipped with resources such as commission calculators and dashboards to help them track their progress every step of the way and view the impact their efforts have on the commission payouts.

Incorporate sales performance feedback

Make it a point to conduct regular performance evaluations and help your sales reps improve with constructive feedback. Letting them know how their performance aligns with commission goals and building a feedback loop will allow reps to understand how they compare with their colleagues, realize their strengths, identify areas for improvement, and motivate them to achieve higher targets.

Maintain flexibility in commission structures

Ensure that your SaaS commission plans are flexible, giving you room to tweak them if required and adapt to changing business needs, market dynamics, and sales strategies. Be open to modifying the commission structures as your company grows, introduces new offerings or pricing models, or enters new markets. Maintaining flexibility in your commission structures will help you remain relevant and effective over time.

How to choose the right SaaS commission structure

True enough, every company has its own business model, goals, sales cycles, churn rates, and other key considerations to factor in. Having said that, you need to choose a flexible commission structure that works well for your sales reps and aligns with your business goals. Commissions can make or break a deal. Analyzing the below factors will help you choose a commission structure that boosts sales productivity and enables you to retain your star performers.

Business goals and objectives

When choosing the SaaS commission structure for your company, you first need to decide whether your primary objective is centered around new customer acquisition, customer retention, upselling, or a combination thereof. You can then design the commission structure to be in line with your company's unique business goals and objectives. Ensure the commission structure rewards actions aligned with your desired business outcomes.

Sales cycle and customer lifetime value

Both the sales cycle and Customer Lifetime Value (CLTV) are key metrics in the SaaS sales process. The CLTV reflects how successful your SaaS company's retention efforts are; higher CLTV rates warrant higher commissions. On evaluating the two metrics, if you find the sales cycle to be longer and the CLTV higher, a recurring commission structure would be appropriate to incentivize the sales reps to bring in long-term revenue. For shorter sales cycles, it would be best to opt for a flat rate or tiered commission structure.

Market dynamic and competitiveness

SaaS companies operate in highly competitive markets. As the markets mature and competition stiffens, commission rates will have to be aligned with these changing dynamics. Study the commission structures used by competitors and similar players in the market; this will help you benchmark your rates against industry standards. At the end of the day, design a commission structure that gives you an edge over the competition in attracting and retaining top sales talent.

Sales team dynamics and motivation

Commission rates can be used to build a desired sales culture within the organization. For this, you need to take into consideration the composition and dynamics of your sales teams. Let's say you have different teams contributing to the sales process. In this case, the commission rates can be structured to incentivize teamwork and collaboration. At times, you may need to take a call between individual performance and team collaboration—and decide which is more crucial for the success of your sales process. Ensure you choose a commission structure that aligns well with your sales representatives' motivation factors and preferences. It should also cultivate a sales culture that thrives on positivity and a shared vision.

Flexibility and Adaptability

On average, the revenue growth in SaaS companies ranges from 15% to 45% year to year. Considering this accelerated pace of growth, SaaS companies need to design flexible commission structures that can easily be modified based on evolving business goals and market trends. Take time out to run routine evaluations on the effectiveness of the commission structure. Also, based on the data collected and the feedback received, it is vital to make iterative improvements from time to time.

ARR and Gross margins

In the SaaS business, your company's value eventually comes down to the Annual Recurring Revenue (ARR) that you make. ARR, the recurring revenue generated by customers within a year, is a top business priority for SaaS companies, and it should be a key factor in deciding your commission rates and influencing sales reps' pursuit of leads. Similarly, as the company attains new levels of growth, it is also important to consider the gross margins in commission calculations. In this case, you will need to factor in the expenses the company retains internally after incurring the direct costs (such as the cost of goods sold).

Pro Tip

Test it till you perfect it: Your commission structure should make sense to your business and your sales reps. Pull up historical or expected data and run it through your proposed commission structure to ensure that you’re on the right track.

How a SaaS commission automation platform can help

Alright, so we get how this might have been a bit much to digest. The commission structures, challenges to tackle, and factors to consider—we know you’ve got your hands full.

Here’s the thing—you don’t have to do this all alone. Setting up SaaS commission plans gets a lot easier with a SaaS commission software! These platforms are designed to automate commission processing, right from the point of feeding in deal details to making payouts. There’s more—you can also derive in-depth and actionable insights from sales commission software using their extensive and intuitive dashboards. Leveraging software such as these will help drive strong sales behavior and motivate your SaaS sales reps to chase bigger goals.

So there you have it—we have given you an exhaustive lowdown on how you can harness the power of commissions to drive sales excellence. While there is a lot of ground to cover, we’re making sure you are off to a great start with standard SaaS commission rates, quick examples, and tips to choose a commission structure that will supercharge your sales and keep your sales representatives productive through the highs and the lows.

Adithya Krishnaswamy