Real-World Compensation Plans

There are some great resources available on sales compensation plans. If you’re interested in looking at what plan options are available, HubSpot’s Ultimate Guide to Sales Compensation is great. If you want information on what other organizations are doing, take a look at Xactly’s 2024 Sales Compensation Report.

Theoretical physicist and Nobel Prize winner Richard Feynman once said, “There’s a big difference between knowing the name of something and knowing something.” He may have been talking about the superfluidity of liquid helium, but the same can be said of sales compensation plans.

You can know about all the options and find out who uses what, but there are still variables that are easily missed and scenarios that can throw a wrench in even the best plans. It’s sort of like the difference between theoretical physics and applied physics. Things are different on the ground.

YOUR MATH HAS TO MATH

We at Maestro have seen a lot of compensation plans and have been part of many as well. Nothing puts the breaks on a salesperson’s quest to hit quota faster than realizing their comp-plan numbers are not based in reality. If they work backward from their target, take into account the length of their sales cycle, average deal size, and average win rate, only to realize that they will need to schedule 517 meetings by the end of the month in order  to reach their goal … they’ll be frustrated at best.

When determining the sales quota for a member of your team, there are many things that need to be considered. How many hours is this person going to work in a year? Are you basing that on 52 weeks? What about vacation? What tools does the individual have available to them to assist them in selling? Beyond the length of the sales cycle, how long do individual tasks take? Dialing a phone number takes a certain amount of time. Whether or not you provide your sales team with a parallel dialer makes a difference in how many calls they can place. All of these things can and should be calculated.

Salespeople should be able to look at their compensation plans and easily see what they need to do in order to reach (and hopefully exceed) their quotas. Not only does the math need to math; the plan needs to be straightforward. There can be bonuses, accelerators, or SPIFs, but the plan shouldn’t read like a Choose Your Own Adventure book or the rules to Bamboozled. Do you remember that episode from Friends? Joey was auditioning to be a game show host for the most convoluted game show ever. The rules, according to Joey: “You spin the Wheel of Mayhem to go up the Ladder of Chance. You go past the Mud Hut, through the Rainbow Ring to get to the Golden Monkey, you yank his tail and boom—you’re in Paradise Pond!” If this sounds anything like your compensation plan, please try again. After all …

SALESPEOPLE ARE HUMANS

This may seem like an obvious statement, but sales leaders tend to forget. “She could be selling so much more if she wanted to!” is something we hear often. It’s easy to think that money is the motivator, but it’s not. Efficient production of money is the motivator. Let’s say someone makes $200,000 working 60 hours a week, but if they worked another 20 hours they could make $215,000. Could they be making more money? Yes. Will they? If those 20 hours are currently being used spending time with friends and family and pursuing hobbies, then the answer is likely no.

Humans, like every other animal, are going to figure out how to spend the least amount of energy to get what they want. It’s not laziness, just biology. So, make sure your compensation plan is created for humans and not machines. Charlie Munger, Warren Buffet’s right-hand man, once famously said, “Show me the incentives, and I’ll show you the outcome.” Another quote from Munger that he shared in 2016 is even better. He was sitting next to Buffet as he said it, and they looked exactly like Statler and Waldorf (the old guys on the balcony in the Muppet Theater). With a large box of peanut brittle next to him, Munger says, “If you have a dumb incentive system, you get dumb outcomes.”

A great salesperson is going to figure out how to maximize their compensation plan in their favor. And as a sales leader, that is exactly what you want them to do. Why? Because you’ve set up the compensation plan so that what you are incentivizing matches up with your organization’s goals. If not, well, that’s where the dumb outcomes show up.

WHERE MATCHY-MATCHY IS A GOOD THING

Before any compensation plans are created, be clear on your company goals. Are you simply maximizing revenue? Do you want to attract new logos? Maybe you’re selling a new solution and you need to get as many customers as possible on the new platform in order for it to be successful. Whatever your current goals are, your compensation plans for your sales team must incentivize those goals.

Let’s say that your goal as an organization is consistent revenue production. Well, then you don’t want a compensation plan that would incentivize your salespeople to reach quota early in the year and then coast for the last six months. It would make more sense to have a monthly quota. It would make even better sense to have a monthly quota plus  an additional “consistency bonus” for those who hit it every month in a year.

Matching your company goals to your company compensation plans means a couple of things. First, it means that as your goals change, your comp plans are going to have to change with them. Second, it means that you need to be somewhat flexible. Let’s say your account executive has quarterly quotas. An unexpectedly large deal was closed unexpectedly quickly in January, so his first-quarter quota has been met. It’s now the middle of March, and there is another large deal in the pipeline. If your AE worked hard, he could probably get it to close before the end of the quarter. But why would he? It would serve him better to drag his feet a bit and close it in April, thus guaranteeing he hit his second-quarter quota.

As the sales leader, what do you do? You know that the longer you wait, the more likely something can go wrong and kill the deal. Your business goals no longer match what you have incentivized your AE to do. So, change it. Tell your AE that if he closes the deal in March, you will put the deal toward next quarter’s quota. Match? Match. Win-win.

If you find that your compensation plans aren’t motivating your team in the way that you hoped, take a closer look and consider whether they are achievable. Not achievable in a perfect world, but achievable in the data world and the human world. Otherwise? Dumb outcomes. Yes, I will continue to quote Charlie Munger. Anyone who can eat peanut brittle into his 90s has earned my utmost respect.

Do you need input on compensation plans for your sales team? We can help you with that! Reach out at mastery@maestrogroup.co.