Dear SaaStr: How Do You Compensate Reps on Multi-Year Deals?
In the early days, when Cash is King, pay the sales reps a full commission on all cash paid up-front. It’s what I did. 95% of the time, this is what you want to do.
As as a SaaS founder, I paid nothing on multiyear deals without cash upfront, because we had basically a 100% renewal rate at term expiration. (We had churn, but it wasn’t due to contract expiration).
This is relatively uncommon, apprarently How Much to Compensate SaaS Sales Teams for New Sales, Renewals and Expansions\
But at this time, cash was king. And bringing in $400k for 3 years of product now instead of $150k for one year that I had to renew twice was 100% worth it to me. Plus, the “churn” risk was pushed out to Year 4, at least from a financials perspective.
Later, cash becomes a bit less important, and if nothing else, you worry a bit about incenting too much discounting just to get the multiyear cash deal.
You have to be careful there. Which is a fair and real concern, even with firm boundaries on discounting. After all, why would a customer prepay multiple years, if not for a substantial additional discount? So if your renewal rates are very high, you are robbing the future a bit here.
Ultimately, after $10m ARR, we moved to a format where we paid out 25% commissions on Year 2 and 3 cash up front, instead of a 100% commission.
Either way, Year 2 and 3 didn’t count toward quota per se. Those years don’t impact your ARR in this calendar year. So I don’t like to see them claimed as “bookings”. But I did pay out on all years where we got the cash.
And it worked. We were cash-flow positive after $5m ARR or so.
Then, I had a chance to see what happens … when you do it wrong.
After we were acquired, for a while the new rev ops team (1) paid 100% commission on multiiyear deals even without the cash upfront and (2) stopped putting in guardrails on discounting.
What happened? Some folks did crazy deals. One rep gave away a lifetime deal for $200k to a big enterprise customer, because he made more than $150k a year for 10+ years.
Incentives do matter here.
(cash image from here)