Is Your Sales Incentive Plan Driving Bad Behavior?

This is one of my five golden rules for setting sales compensation (see related article titled “5 Golden Rules for Setting Sales Compensation Plans“).  Within legal and ethical limits, a good sales reps should do whatever puts the most money in their pocket and it’s up to the company to make sure that behavior is consistent with the company strategy.  But this is sometimes easier said than done so let’s explore further.

Take for example a company that is just getting started and the thing that is most important to them is establishing a base of customers.  This might cause them to pay their sales reps a certain amount for each new account they secure.  Perfect, right?  Well, if the definition of “new account” just means they bought something, a savvy sales rep looking to maximize their earnings will sell the easiest thing just to land the new account compensation.  If the easiest thing to sell is of such minimal value that simply paying the sales commission crushes your profit margins, then you have a problem.  So your reaction might be to add a qualifier, such as requiring a minimum amount of revenue from a new account in order to qualify for the sales commission.  But now you’ve broken rule number two in sales compensation planning, which is to never change the rules in the middle of the game.  Rule number one, in case you’re curious, is to make sure sales compensation is aligned with business strategy.

Let’s say you have no choice but to make this change.  Your sales rep might immediately ask if the revenue amount is an all-or-nothing proposition or if there is any sales commission for a new account with a little less revenue.  With that you might decide that you’ll pay half of the commission amount for any new account, regardless of the deal size.

You can see where this is going.  Before you communicate the sales compensation plan, think it through by putting yourself in the shoes of a sales rep that wants to maximize earnings.  How might they go about doing that and where might they identify loosely defined targets/rules or other “gray areas”?  If there are ways for your sales team to maximize their earnings that aren’t consistent with your business strategy, then adjust accordingly – but without adding so many rules that your sales team needs a magic decoder ring to figure out if/when/how they get compensated (another one of my golden rules).

Wait, there’s much more!!!

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Author: Gordon Daugherty

Over the past 15 years Gordon has seen more than 1,500 startup pitches, given personal advice to more than 500 entrepreneurs and been involved with raising over $45M in growth and venture capital. Throughout his 28 year career in high tech, Gordon has two IPO’s and a $200M acquisition exit under his belt. Now, through his advisory practice called Shockwave Innovations and as Managing Director for Austin’s Capital Factory startup accelerator, Gordon’s focus is purely on educating, advising and investing in tech startups.

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