Updated November 2022
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 seven times in two years), and some other companies never touch it. They use the same plan they’ve had for years.
The one constant we see with incentive plans is that salespeople HATE it when you change them. Every time the new plans get rolled out, most salespeople respond with something like, “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 salespeople 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. This is the ongoing cycle with incentive plans.
So why is this a barrier to growth? The short answer is that we find many companies with incentive plans that are not aligned with what the company is trying to achieve.
For example, we have come across several companies that claim 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 that they track every month. However, their salespeople are not hitting those goals, and they don’t understand why.
When we look at their incentive plan, we find that all sales are paid the same. If a salesperson sells a $10,000 deal to an existing client, they make the same as if they sold a $10,000 deal to a new client. Selling to existing clients is easier, so salespeople gravitate to those sales. Selling to new clients is harder and takes longer, which 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 is incentive plans that pay on total revenue, but the salesperson has control over pricing. For example, Salesperson A sells a $10,000 deal to his customer but discounts it by 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 it. Do the same modeling if you lose a big customer.
The bottom line is that you want your salespeople to get paid for doing the things that the company is trying to achieve. This is one area that deserves attention every year.