Stijn Hendrikse provides a quick overview of the four stages of growth that every B2B SaaS Company goes through as they build their SaaS Marketing...
How to build a SaaS sales incentive plan
Your SaaS company is only as good as your employees’ performance, and this is especially true for sales team members. Still, motivating your salespeople to operate at their peak productivity levels is difficult.
To combat this, your software company can put sales reps on incentive compensation plans. This means you're offering additional money to your employees based on their performance, in addition to their base salary.
A well-designed, thoughtful incentive compensation plan can increase revenue, raise employee motivation, and help your business grow to achieve T2D3 growth. Follow these nine steps to build your SaaS incentive compensation plan, and you’ll be on your way.
A SaaS sales incentive compensation plan template
When creating a sales incentive compensation structure for your B2B SaaS Sales team, it’s critical your plans drive the desired outcomes and behavior for your company.
1. Incentivize the right business outcomes
When you decide which actions to incentivize, make sure they align with your long-term business goals and objectives. The most common performance measure for sales reps is pure sales volume calculated in total revenue or licenses sold.
You should pay your sales representatives for driving ARR (annual recurring revenue) rather than short-term, “one-time,” or professional services revenue.
Sometimes, SaaS sales managers want to provide an extra incentive to sell specific product or service packages, or to sell to certain types of customers. This varies depending on SaaS economics (the cost to service or lifetime customer value) for customers who fit your Ideal Customer Profile (ICP) or who use specific variants of your service.
New products and services are often more difficult to sell for your sales team as it’s harder to explain, unfamiliar to them, or you don’t have the same sales enablement content or marketing momentum. Because of this, your SaaS sales incentives should put additional emphasis on selling this new part of your value proposition.
2. Pay the right amount to get the right people.
Your SaaS sales incentive plan should provide talented salespeople a competitive compensation package based on where they live and what industry they’re in.
Depending on where your workforce is based, you may have to pay two people in the same role differently. Someone living in Atlanta with the same level of experience as someone in San Francisco can command different pay levels.
If you need to hire someone to build your business in a new vertical industry, the revenue targets could be lower compared with one of your more established markets. Because this job will be harder, you’ll need to pay this person a similar incentive compared to someone selling in one of your SaaS product’s established beachhead markets, even if the sales revenue will be lower at first.
3. Support a growing, complex sales structure.
When designing sales incentive compensation plans, tailor compensation to each sales role. Your executive salespeople selling to global accounts shouldn’t receive the same compensation as your junior salespeople setting up discovery appointments.
Your incentive program needs to accommodate a multi-level sales team with the following specialist roles:
- Individual sales representatives with an assigned territory who need to reach a target based on their territory.
- Specialists who service all the territories should be paid based on the comprehensive, combined target
- Managers of multiple salespeople need to get paid on their combined targets.
Your incentive compensation strategy should encourage the highest level of performance from all of your salespeople, regardless of their role or position. Ensure that everyone’s incentivized to drive business results, from specialists to managers.
4. Align the fixed/variable pay mix with the role
Provide different fixed/variable pay mixes that make up the “On Target Earnings” (OTE) total for your team members.
The biggest consideration when setting your SaaS sales rep OTE is the market compensation for your industry. If your sales reps feel like they’re under-earning compared to other SaaS companies in similar verticals and markets, you’ll have a hard time retaining talent on your sales team.
Another important part of determining pay mix comes down to how much influence your reps have over sales. If the rep has little to no influence over outcomes, the bir base salary should be a high percentage of fixed earnings. However, if your reps make or break sales, their commission should have a higher percentage of OTE.
A “hunter” type of sales role will thrive on a 20% fixed, 80% variable incentive structure. In contrast, someone in a more technical sales role presenting demos to your prospects and building complex proposals might be more productive with a 70% fixed, 30% variable plan.
5. Incorporate long-term strategic goals into incentives
In addition to pure revenue goals, a good SaaS incentive program allows you to incorporate other business objectives and targets that are of strategic importance to you. Examples of this may include sales enablement materials such as customer testimonials, references or referrals to potential prospects, our customers in a particular vertical.
Adding incentives that align with attaining specific targets can solve your company’s marketing and sales goals that may conflict with driving pure SaaS sales. To learn about setting goals and objectives around incentives, read about managing your sales and marketing team's OKRs.
6. Support your market segmentation
Create sales territories (or segments) of accountability that support the goals of your business growth.
Timezone-based territories are an excellent start to align your SaaS sales team availability with the time when the selling needs to happen. Still, you can align with industry or vertical territories, or product/solution segments, to support your business’s market segmentation.
A standard model for smaller SaaS start-ups in the North American market is to split the territory east and west of the Mississippi River. Then, you can get more granular when splitting up timezone alignment, and after that, most companies align territories with large metropolitan markets.
Segmenting your markets by geography can help align your sales segments with the size of the opportunity for your salespeople. Historical sales, or lead volume, can be a good indicator in addition to raw numbers like the distribution of businesses in a geographic area.
7. Pay for outcomes, not activities.
I recommend you only pay sales incentives when the desired business outcome is realized. This usually means the money promised from the customer must be in the bank, or you’ve at least received a purchase order (PO). Signed contracts or email commitments usually don’t count in this care.
One exception to this rule can be how you pay salespeople who only work with prospects during the early stage of the funnel. Often, you’ll have a Business Development Representative (BDR) who prepares “Sales Qualified Leads” (SQLs) for sales and the salesperson isn’t impacting the quality of follow-up by the Account Executive. In that case, it’s possible to include an incentive based just on those SQLs.
You can calculate the typical value of the SQL based on your Annual Contract Value (ACV) or Lifetime Value (LTV), and historical conversion rates of SQLs to wins. I recommend you still keep part of the BDR incentive tied to the ultimate revenue generated, but you can combine incentives with partial payment for just driving the SQLs.
8. Implement an accelerator
The best salespeople are often lazy. You want those. It’s excellent behavior that optimizes for maximum sales impact. It also means that you need to implement a SaaS sales incentive model that provides enough incentive to those salespeople, even after making enough money to pay their mortgage, the kid’s college education, and their next vacation.
An accelerator can help with that. Here are some examples. I also recommend a cap on the incentives, especially since most fast-growing B2B SaaS Companies don’t have a lot of historical data to support proper quota setting. A windfall deal can benefit specific individuals unfairly if you don’t have a cap.
9. Be careful with clawbacks
A clawback provision means that the salesperson has to return incentive-based payments if the client never pays an invoice or churns within a specific period of time. You should only pay incentives out when the client payment is in the bank to prevent the reason for clawbacks and helps incentivize your sales reps to follow up and drive payments. A clawback driven by customer churn incentivizes sales to follow through with their customers and promote high retention rates, an especially critical metric for SaaS businesses.
The clawback period will differ per SaaS company, but should align with the time it takes for a customer to realize the value of the service. The period between three to six months can be a good starting point, and can be adjusted as you learn.
The main challenge with clawbacks is the risk of your sales, accounting and finance departments spending too much time calculating earnings and adjusting complex payout trackers. For this reason, you should only implement clawbacks if you can keep the math relatively simple. There are many sales commission solutions, like Performio, to help with these calculations as your SaaS sales team grows in size and complexity.
Finally, make sure to check with your legal team to ensure that you’re not violating employment laws in your state. Lawsuits can be very costly.
When implementing a change to your sales incentive or commission structure, examine what your team members made historically and align their new OTE mix (base pay plus bonuses), so they’re likely to make the same when they do a good job.
Here is an example of a sales incentive model for you to get started.
Final tips for implementing a successful SaaS incentive compensation program
As you develop a better understanding of your SaaS business and compensation plans, follow these simple tips to ensure that your incentive compensation program is successful:
- Over-communicate your expectations and guardrails. Your salespeople will care about what you’re saying if it’s directly related to their pay. Make sure your team understands the details of your sales program, who’s eligible, how they’ll be paid, when they’ll be paid, etc. Your internal communications team can support you with any materials to streamline this process.
- Take advantage of technology. Calculating compensation with clawbacks, different pay mixes, churn, and incentive programs gets complicated as you scale your company. Make sure to take advantage of an incentive compensation management tool to automate and streamline your calculation process. This will also ensure tht your reps are paid on-time, accurately, and everyone’s kept happy. You don’t want to fall through on your promises and then discourage future performance.