This post is a companion piece to our how-to guide on SaaS Sales Compensation: How to Design the Right Plan. We recommend starting with this first, broader post.
When to pay commissions
Another important consideration in your plan, in addition to what you pay, is when you pay commissions. There are three options, each with it’s own implications:
- At the time of booking
- At time of first payment by the customer
- At the time of each payment by the customer
Each company will have their own optimal approach to this. The Bridge Group found that 38 percent of SaaS companies pay commissions when the cash is collected, another 35 percent at booking, and 20 percent when invoicing the customer.
If there is a long lag between the time of booking and first payment, you may want to pay your sales team before the customer payment to keep them motivated, but this will put greater strain on your cashflows. Paying at the time of each payment keeps commission payments closer to actual revenue recognition, and is helpful if you need your sales team focused on retention. But this can result in a more complicated accounting process.
At Matrix, we typically we see the second option, payment at the time of the first payment, being used with a clawback in event of a customer churning.
Accounting for commissions
Along with when you pay, you also need to decide when to recognize commissions in your accounting system. There are two options:
- At the time of booking and payment to the sales person.
- The disadvantage of this option is that you can have large losses in a quarter where you have strong bookings. However, this seems to be the prevailing option for early stage startups. Our SaaS Survey found that 72% of SaaS companies recognize the cost up front.
- Ratably over the length of the contract.
- This requires a more sophisticated tracking and accounting system and thus is likely better for companies considering going public in the near future.