How to Manage Commissions on Recurring Revenue

by | Jan 26, 2022

Salespeople who peddle in long-term contracts generally earn commission on recurring revenue. This is common for SaaS organizations or other companies that sell subscriptions. For these types of organizations, the structure of the commission plan needs to provide competitive compensation.

We’ve worked with a number of organizations that fall into this category. In doing so, we’ve learned a thing or two about these types of plans.

A well-structured recurring revenue commission plan will motivate salespeople and earn organizations more money.

Recurring revenue commissions come in all shapes and sizes. A lot of it has to do with when, what, and how a company plans to pay commission.

The How

Typically, companies that rely on recurring revenue, compensate salespeople with salary plus commission. Of course, employers also choose to go straight commission or implement a bonus program. However, those methods are less popular among SaaS and other long-term contract salespeople.

An organization aiming to sell high-priced subscriptions needs talented salespeople. Attracting that talent means offering a compensation plan that feels secure. Combining a reliable salary with a commission based on their sales checks a lot of boxes.

Of course, the method really depends on your organization’s needs and requirements. If another style fits better within your financial plan, go that route instead.

The When

In some cases, companies schedule commission upon the sale of a contract or subscription. Other plans hold commissions until the contract or subscription is fulfilled. Still, other structures distribute a portion of the commission throughout the lifetime of the contract or subscription.

Paying commission throughout the contract offers the best of both worlds. That’s because if an organization pays the commission upfront, it risks financial loss if the contract is later canceled. That sometimes results in a chargeback, which no one likes.

However, waiting to pay commission until the contract is fulfilled may leave employees frustrated and financially unstable. The in-between option balances the risk for both employer and employee.

The What

Once an organization determines how it will pay the commission, they need to calculate what to pay. In particular, what rate will salespeople earn on a contract or subscription? This decision comes with a lot of questions that only your leadership team can answer.

First off, it’s important to consider on-target earnings (OTE) for salespeople. When measuring OTE, an organization needs to set a compensation range that keeps salespeople happy. On the other hand, it also needs to make financial sense overall.

If the compensation method is a 50-50 split between base salary and commission, split OTE in half. For instance, if OTE is calculated at $60,000, the base salary will be $30,000. The potential commission a salesperson can earn will then fall at $30,000. Now extrapolate that further: how does that break down the potential yearly sales for a single salesperson? And what rate will fulfill that potential commission?

A little extra arithmetic will land you on the right answer for the rate. With that in place, you’ll have the full sales compensation package realized. It’s time to implement and automate.

We’d be thrilled to help you implement whatever recurring revenue sales commission plan you build. Our application can handle any incentive package — no matter how complex. Contact us for more information. We can also walk you through all of our tools with a free demo. Can’t wait to learn more about your commission plan details.

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