#10 – This is The Worst Compensation Plan Ever, But Don’t Change It!
Incentive/Commission plans are a funny thing. Many companies revise their plans every year. Some companies do it more often (the record, I heard, was 7 times in 2 years) and some other companies never touch it. They use the same plan that has been there for years. The one constant we see with incentive plans is that reps HATE it when you change them. Every time the new plans gets rolled out, most reps respond with “management is trying to cheat me” or “they are just trying to figure out how to pay me less.” That happens for the first few months of the new plan. This is where it gets funny. At the end of the year, these same reps start lobbying for reasons NOT to change the plan. Why is that? That’s easy. They figured out how to work the plan to their advantage. So is the ongoing cycle with incentive plans.
So why is this a barrier to growth? The short answer is that we find many companies that have incentive plans that are not aligned with what the company is trying to achieve. For example, we have come across several companies that tell us that they are going to achieve growth by adding x number of new clients this year or $y in revenue from new clients. They tell us they have goals established for this and they track it every month. However, their sales reps are not hitting those goals and they don’t understand why.
When we look at the incentive plan we find that all sales are paid the same. If I sell a $10,000 deal to an existing client, I make the same as if I sold a $10,000 to a new client. Selling to existing clients is easier, so the reps gravitate to those sales. Selling to new clients is harder and takes longer and that delays their commission. Why would they do that? This is a clear misalignment of strategy and incentive and it happens all the time.
Another common example of misalignment we see is incentive plans that pay on total revenue, but the rep has control over pricing. For example, Rep A sells a $10,000 deal to his customer but discounts it 10%. He still gets paid his x% on $10K whether he keeps value in the deal and avoids the discount or if he gives away margin and the company takes a haircut.
We recommend evaluating your incentive plan every year. Determine whether it is truly achieving the things you want it to achieve. Does your corporate strategy call for you to land new clients, sell a new product or service, expand into new geographies, or get growth from the existing customer base. If so, align the pay system to those goals. Reward for achieving company goals. Don’t just pay on sales in general. Then model out your new plan. What would happen if somebody landed a couple of big deals? Calculate the result and determine whether you are comfortable with the result. Do the same modeling if you lose a big customer.
The bottom line is that you want your sales people paid for doing the things that the company is trying to achieve. This is one area that deserves attention every year.