The 5 Myths of Building Comp Plans⎪Predictable Revenue

There are so many things to think about when running a sales team: leads, opportunities, collateral, team morale…the list goes on (and on).

Of course, that’s not to mention the closes – the all-important closes. In fact, when you boil everything down, when you chose one metric by which to gauge the effectiveness of your sales team, it’s the revenue they are generating. That critical metric, however, can often overshadow other important day-to-day elements of a high-functioning sales team. One such element is comp plans.

Let’s face it: every salesperson thinks about them (more often than they would admit, likely)…but how much critical thought, analysis, and reflection is put into designing them? Often, comp plans are brought in and implemented because they worked elsewhere and sales leadership needs to turn their focus to more pressing matters.

So for this live webinar edition of The Predictable Revenue Podcast, we decided to take a closer look at the nuances of comp plans – and some of the myths surrounding them.

“Comp plans can account for 10% of a company’s overall revenue. And comp plans are huge for salespeople – they think about them constantly. But their lack of attention is a combination of factors: when a new VP comes in, they feel pressure to deliver and the comp plans seems to fall. It’s not a priority, for some reason. But, it is and it is huge for salespeople,” says Jeron Paul, on a recent edition of The Predictable Revenue Podcast.

“You need a commission plan that is well thought out. The whole point is for people to use their own intelligence to make decisions that align with what you want them to do.”

Myth 1: Commissions Don’t Matter Much

There is a lot of research on this, going back to the 80s, says Paul. In those days, the thought was that commissions are nothing but a hygiene factor – just pick some amount and go with it. Everything else will fall into place.

Of course, there is a lot of new research that debunked that: commissions can literally affect your top line revenue between 8 – 20%.

Related to the importance of commission is the still prevalent trend of commission caps. Believe it or not, companies still do this.

“There is so much data now for this, and it is clear: commissions do matter, and they make a difference. And companies cap this a lot…but it is wrong. Uncapping commissions will help grow your company,” says Paul.

“Maybe reps would make more money than a CEO – but who cares? CEOs are usually equity driven.”

Finally, the issue of quota ratcheting is something that sales leaders must address. For those unfamiliar with the concept, quota ratcheting is the practice of increasing a salesperson’s quota because they crushed it the year before. That’s right: you did great…now you have to do better next year to make the same money.

This should be eliminated immediately, if it’s a practice you engage in.

“With all this said, comp plans will evolve over time. They have to, as the business changes,” says Paul.

“But they deserve thoughtfulness so your sales reps can prosper.”

(Editor’s note: we had Zach Barney on the pod a while back to discuss the power of spiffs. You can read about our chat here, or listen to the whole in-depth interview here)

Myth 2 – Straight Line Commission are Better Than Complex Commissions

This is a tricky one, admits Paul. Clarity is a great thing, and comp pals should always be clear to the people that operate within it.

But clarity and simplicity aren’t the same thing. The trick is to make sure your plan mirrors your business.

“I’m on the side of a little more complex. But, every comp plan needs to be tailored to the dynamics of your company. There is not a one-size fits all solution,” says Paul.

“It really depends on your market, sales cycle, and how much is in the control of your reps vs. not.”

And don’t forget: sales reps are smart, and they figure out comp plans pretty quickly. Of course, there will be questions from time to time. So, instituting accelerators are important to keep your high performing reps moving.

You’ll be glad you did.

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Myths 3 and 4 – Quota Bonuses Aren’t Always Effective and Accelerators Aren’t Worth the Complexity

Let’s look at quota bonuses first.

Many companies employ versions of quota bonuses: you get into 8% compensation range if you sell x or you get 10%, if you sell y.

These basic models are used to good effect, as they motivate your high-performing reps.

But, it is possible to structure quota bonuses in ways that they aren’t effective. For example, if you use the aforementioned ratcheting technique. If your rep crushed it, enjoys the fruits of accelerators, but then you punish them for that success a year later…that will not inspire your team.

Gaming the system is also a very common feature of commission plans, especially if there are comp accelerators tied to time constraints.

For example, reps can push and pull deals: pull deals into a quarter to make quota and enjoy the accelerator, or push them out into a subsequent quarter to reap the benefits later on. The question for sales managers dealing with this: does this really matter? Does it decrease your revenue?

“When there are accelerators, there is often gaming, and I’ve been fine with it,” says Paul.

“I’ve actually tried to help reps put deals into the quarter when they’ll get the most pay.”

As for accelerators, well, they are worth it…as you can tell. Reps love them, they motivate your team, and they increase revenue.

Myth 5 – More Frequent or Less Frequent Bonuses…Which is More Effective?

This myth, again, is demonstrated to help a lot. In the sales world there is certainly a mounting pile of evidence that more frequent bonuses are more helpful to sales teams, says Paul.

This is a critical factor to consider: just because bonuses are paid out more frequently doesn’t mean you are paying out more money. It is just tied to more frequent cycles. (For example, we pay people out as quickly as possible at Predictable Revenue).

“It keeps the team motivated and, again, helps inspire some to become top performers,” says Paul.

“That the power when the loop between action and reward is tight.”

For more on Paul’s thoughts on comp plans – and their effects on sales reps, check out the rest of his interview on The Predictable Revenue Podcast.