In this post, we will briefly explore what Staged Commissions is and then we will look at 3 great reasons as to why to use them.
So, what is a Staged Commission Structure?
As opposed to a flat rate commission structure where full commission is paid at deal closure, staged commissions allow you to stage commission payments according to certain milestones being hit by your reps. For example, a rep could earn fifty percent of their commission rate when a deal is signed. After that, they'll earn an additional twenty percent based on the customer paying their first invoice, and the remaining thirty percent when the customer renews after twelve months.
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In summary, the rep can retire the full sales deal value against their quota, but their commissions payments are managed on a staggered basis separately.
Why implement Staged Commissions?
The top 3 reasons we have seen customers implement Staged Commissions are as follows:
1. Post-Deal Rep Engagement
Once the deal is done, you may want the rep [who has established good contacts/rapport with the new customer] to help establish relationships for your wider teams such as Finance and Customer Success. Who to speak to for payment on the first invoice? Who to connect with to ensure onboarding completes successfully? Who are the customers escalation points to ensure appropriate support channels in the future? Finance may also need help organising the customer's first renewal in 12 months time. Staggering the commission payments per deal ensures the reps do not just ‘cut and run’ once the deal is done.
2. Cashflow
‘If Cash is King, Cashflow is Queen’
Cashflow rules the day, whether you are a small business or an enterprise organisation. Commissions payments can have a significant impact on cashflow, so it's worth considering staged commissions to help manage your cash outflows. The stages need to make business sense to the reps as they will not really care about your cashflow. It needs to be managed well though with visibility / transparency essential for the reps – “where can I see what I am due for future stage commission payments?.” However, once managed well, this can be a great cashflow strategy for your business.
3. Complex Sales Cycles
This all depends on the types of deals your organisation / business unit is processing, but in some scenarios, you could be dealing with complex sales cycles where initial orders are signed but they then move into a complex “contracts” phase, which could take months to finalise, and in some scenarios, get cancelled. By leveraging staged commissions, you can pay a certain % of the commission at order form sign-off, a certain % at contract sign-off, and a certain % for the final contract value [this also works well when the final contract value can vary from the initial agreement]. If the contract is cancelled, you’ve only paid a relatively small amount of commission upfront so no real need for commission ‘clawbacks’, which can have negative connotations.
Connecting the Dots
These are just a few examples of the benefits your organisation can achieve with Staged Commissions. Once the right processes and systems are in place to manage this, you’ll never look back!.
Interested in a deeper dive into RevOps? We wrote a whole series breaking down everything you need to know. Check out part I here.