I had a chance recently to sit down and listen to Jim Kelleher, CFO of LogMeIn, at a recent meeting of the Massachusetts High Technology Leadership Council as he described his experiences with SaaS Sales Compensation plans. It’s always interesting to hear what others are doing with their sales comp strategies and plans, especially from someone with such a broad level of experience and a track record of success in the SaaS world. I am happy to share with you this brief breakdown of some real world advice from Jim.

Background: LogMeIn is a SaaS business in the classic sense:

• Business user drives sales cycle
• 90% of business is linked to annual contracts
• Much of the sales cycle is facilitated via its website, product trials, etc.
• Low churn rate (90% renewals)
• All sales are direct, no channel sales (simplicity is a theme throughout)

In the SaaS world, it's critical to understand if your corp. strategy is based on growth (new sales) or stability (renewals). You need to be sure your plans reflect this strategy and are not rewarding salespeople for doing things you do not want them doing. Lets dive right into the meat of the discussion:

Core Plan Questions; How to handle new & renewal sales?

• Should plan be built around Bookings or MRR?:
  • At LogMeIn, with 90% renewal rates, the focus of sales strategy is on new business, renewals pretty much take care of themselves. In this case, Monthly Recurring Revenue (MRR) as a measure may not be a great fit with this strategy as it MRR includes a territories entire book of business, new and renewals. Depending on the percentage of renewal business, this could reward a sales rep for doing activities focused more on account maintenance than new business growth. This is a big debate topic within the SaaS community right now where renewal rates may ultimately be the key decision point in plan design.
• So, how does LogMeIn manage renewals?
  • With a dedicated team of Account Managers whose plans include components built around rewards based on renewal rates with meaningful rewards for improvements to the renewal rate baseline.
  • For new sales, reps are given credit for the annual contract value at booking.
    • LogMeIn wants their reps focused on booking annual contracts.
    • Pay on booking rather than revenue recognition, sales pro’s close deals, the booking date is when the deal closed, at that point they have done their job.
    • Enforce claw backs if a contract is cancelled. This aligns with business realities.

Plan Structure:

• Focus on one set of rules for everyone (finance & sales), sales credit should equal quota credit.
  • When sales & quota credit diverge, there is typically a disconnect developing between business success and sales success.
  • Annual quota, booking based achievement tiers with monthly payouts based on accelerated payout rates as reps approach and exceed quota.
  • Use Presidents club as a motivator for performance above quota. Set club at 110 or 115% of quota so reps have something to shoot for after they attain quota.
  • Centralize control of plan changes within finance or HR, this is what they are trained to do.
  • Have a formal plan document and approval process that spells out all the policies & procedures.

 Be flexible:

• Allow regional managers to run Spiff’s (as long as within reason and budget).
• The plan should not be completely a black & white administration of business rules. There should be some give and take, this encourages collaboration, collective support and buy in.

 Simplicity is critical:

• Pay out all services at a fixed commission rate (say 3-5%) rather than a quota based sales incentive.
• Strive to minimize gaming of the process & plan.
• Consider limiting quota differences between reps in similar roles. You can do this by making sure there are level territories. This makes the plans that much easier to digest and understand.
• How should you handle multi-year deals? Pay on the entire total booked deal if total payment is received up front, otherwise treat year one as new booked business and treat everything from year two and beyond as a renewal.

 Avoid:

• Splits are OK as long as they add up to 100%; but be careful to avoid double comp situations where a split adds up to more than 100%.
• When dealing with Channel sales, be sure that bookings reflect what the company gets paid!
• Building a plan that pays on Gross Margin, but it’s OK to provide sales management with stiff discount rules & policies.
• Tying incentive comp to non-revenue based plan measures such as appointments, number of demo’s, # of calls, etc.
• Monthly resetting of FX, set plan rates for currency conversion once a year with the understanding that some years you win, other years you lose.
• Paying reps on cash receipt, unless you want highly compensated collection agents.
  • It may be appropriate to include a provision in the plan about payment terms as this is something they control during contract negotiations.

Read more on SaaS plan basics here: http://www.netcommissions.com/blog/bid/131285/Why-SaaS-Sales-Compensation-Plans-are-simple-but-damn-hard-to-do-well