When revenue is uncertain, how should tech companies pay sales commissions?

Tech companies often face long time lags between booking deals and realizing revenues, which may lead to uncertainty in payment timing and revenue amounts. This can be a big cause of tension between sales representatives and their employers. The sales representative who closes a sale expects, understandably, to immediately receive their commission. But the finance department hasn't yet received any revenue to pay that commission.

Companies that have conventionally paid sales representatives’ incentives at the time of booking often struggle to motivate their sales reps while aligning those incentives with their goals in fiscally responsible ways. Addressing the uncertainty of revenue, fundamentally, comes down to structuring compensation-plan risk. Commercial executives can resolve the dilemma of managing motivation and revenue realization in two ways: by either reducing the risk of each deal and changing how their compensation plan handles that risk or by adapting their compensation plans to accommodate risk. Here are a few considerations to help inform your company’s compensation strategy that involves looking beyond and within your SIP.

1. Revisit contract terms to better define revenue expectations. Contract language can be powerful because it can guarantee a certain level of revenue. If a client wants to sign up for a discount in a higher-volume tier, the client may commit to a higher level of spending. These contracts create more predictable revenues, which can then inform sales payouts. 
   
   While your model may vary, there should be a shared incentive for a sales representative to sell a three-year, unlimited consumption plan at a fixed price—that is advantageous to the company—versus a plan with much lower minimum commitments, made with the hope of earning money on overage fees. This would reduce the company’s and the sales representative’s risk and make the commission conversation that much easier.
2. Identify whose job it is to secure the revenue. Role structure is always linked to incentives: Is the seller an account executive with a territory of prospects they must churn through to get 20 wins this year? Or, is this one of 60 current customers an account manager should sign and nurture? A pure hunter should be paid promptly so they can focus elsewhere, whereas a farmer who will be with the account over multiple years can wait. Be careful when paying hunters: It is reasonable to have some risk-mitigation language that holds back payment from the seller if your company never collects revenue.
   
   If you find that, to drive revenue, your hunters must engage with clients long after the initial contract signing, then perhaps you should consider a new structure for your company’s sales team and instead deploy hunter-farmer hybrid sellers instead of maintaining separate teams. If a customer success team is responsible for picking up the account management play, then find ways to manage and incentivize the hunter, as early as possible, to cleanly hand over the account for the smoothest possible onboarding.

After seeking risk reduction and alignment-to-role, the decisions in compensation become about plan mechanics. If there is still significant enough risk in the compensation plan to address, consider these tips. 

1. Avoid clawbacks at all costs. Stay away from situations where the seller who closed the deal would owe money to the company. Some companies recover money from sales representatives if the rep performs poorly or if profits plummet. But clawbacks are deeply demotivating, and they increase attrition. The expense of searching for a new rep combined with the costs of lost productivity almost always exceeds any savings from clawbacks. You also may not realize planned sales incentive plan (SIP) savings until the end of the year when there is a need for a true-up or to reconcile balances. Very few organizations have the stomach to ask sellers to write a check when it’s time to settle year-end accounts.
2. To inform payouts, estimate the deal’s value at closing. If you have the ability to estimate the deal's value based on historical data for the customer segment and product, then the risk is not the full sum but actually just the variance of the deal. In this case, it would be best to simply pay the representative at the time of booking and budget for predicted losses, with some contingency language in place to cover unusual outcomes. For more variable situations, you could consider paying 50–75% of the deal’s value up front and then true-up at the 6- or 12-month mark, or when you are able to accurately estimate the full value.
3. Pay within a single year. Delaying rewards for more than 12 months risks subjecting your sales reps to three simultaneous compensation plans at once. This creates paycheck confusion and administrative nightmares.
   
   For example, say a rep closed a deal in December 2020 with the stipulation that they would earn commission on any revenue the deal generated throughout the next 24 months. This means that the 2020 SIP was in effect from 2020 into 2022. If product sets change or quotas grow, product commission rates will likely decrease or merge with other rates, creating confusion for the rep about how they earn. It also makes it challenging for organizations to determine their highest-annual-earning reps.
4. Plan for upside and downside scenarios. If consumption triples expectations, how do both sales representatives and their companies benefit? If a sales rep was fully paid for the estimated value at booking and the company owned the risk, then it’s fair for the company to keep the upside, or the potential increase in value. If the rep is paid over time, then both parties share risk and therefore the rep is owed more of the upside. It is also important to consider whether the rep's ongoing client interactions affected this revenue. Revenue from macroeconomic shifts in value should go to the company. But in cases when the rep secured additional wallet share through client relationships, then that rep should be entitled to reap the benefits.

As with all good questions, there are no easy answers. What you decide must ultimately align with your company’s culture and values. In some cases, companies implement clawback protection because finance departments advocate for them to hedge risk. But tampering with sales payouts in any way can lead to a dysfunctional compensation plan that requires a consulting engagement to unwind.

Sales representatives often expect to be immediately paid in full, although some payment deferral is acceptable. If you can create a SIP that pays reps within a year—one that limits clawbacks to situations where your company did not receive revenue—you are doing pretty well.