Where Most Comp Plans Go Wrong

After over a decade of designing comp plans for SaaS companies, as well as reviewing hundreds of plans, here’s a few pieces of advice:

Start with the Why

You need to start by understanding why you’re putting together compensation plans in the first place. The reason you’re adding variable comp to someone in sales, CS, partnerships, RevOps, marketing, or even product is to drive specific behaviors and outcomes. That’s really what it all comes down to.

So you need to have keen understanding into the specific behaviors or levers you need to focus on to hit your monthly, quarterly or yearly targets. Dive into your data and look at where the opportunity lies.

Far too often these plans are put together only focusing on lagging indicators such as quarterly sales targets, inbound leads/opportunities or annual net retention. But if you’ve identified that more upfront payments, more multiyears, driving more leads from a specific customer segment, or conducting more quarterly business reviews (QBRs) will help accelerate growth, make sure you include them in your comp plans.

Don’t Overcomplicate It

The problem with #1 is that you can get too in the weeds and start identifying too many items you want your team to focus on. For example, you might want your sales reps to sell more multi-year agreements, get more upfront payments, sell more of a specific package, sell more licenses upfront, generate their own opportunities and reduce discounts. You then slam all those into a comp plan and guess what happens? You move the needle on none of those items. Pick the 2-3 (tops) that will have the most dramatic impact on the business and focus on those. If the compensation sheet starts looking like a complex matrix, or if your compensation plan is more than 2 pages long, it’s too complex.

Focus on the Controllable

I’m a big proponent of making sure items in the comp plan are controllable by that individual. If a customer churns after one year, and the sales rep had nothing to do with the customer post sale (by design), then that rep shouldn’t be penalized. Alternatively, a sales rep should not be paid on any renewals either in that scenario.

What’s also generally out of Customer Success or sales hands is collections. I’ve never liked leveraging these teams for that. Usually, there are financial process improvements that can be made to help with this. But, having your decided Customer Success Manager reach out to ask for payment isn’t going to make any strides in building the relationships they’re in charge of forging. Nor is it time well spent for your sales team to try to hunt down late invoices.

Don’t Set Unrealistic Targets

Every leader wants to showcase a high on-target earning (OTE) number to attract the best talent. But if you’re creating unrealistic targets just to bump the OTE that you’re presenting to candidates or your current team, it’ll come back to haunt you. First, it won’t take long for everyone to figure out the goals are unattainable. Then, the motivation and energy will be gone as the team isn’t interested in putting in that extra effort to achieve maybe 70% of their target. After that, you’ll start to see your top talent leave. But it doesn’t stop there. You will also start having challenges recruiting the same talent you could before because this information is now widely known and circulated online (companies like RepVue). Set realistic goals and give the team the support they need to achieve it.

Never Cap Variable

Zero reason to cap commissions, ever, in any role!! I spoke to a CEO once who had commission caps as there was concern of the high payouts if some monster deal, that they’ve never been close to selling before, came in. He pegged the likelihood of that at close to 0%. So by his own account it’ll never happen and even if it does, why the heck not have that rep make a fortune? What a great story. Use it, market it, sell it. But, by creating a cap there’s now a stigma associated with the compensation that it’s capped whereas other companies in the same industry are uncapping their commission. It’s harder to recruit top talent with capped commission.

Compensation can be supremely complex, and there are a lot more factors in comp design such as bonuses, overachievement %s, clawbacks, etc.

Small changes can have a massive impact on your growth, both in a positive and negative manner. If the results aren’t there or you need some help in designing compensation for your team, we can help.

Dave Thomson

Founder, ATLAS Revenue Group