Is Your Sales Incentive Plan Driving Bad Behavior?

By December 29, 2012Compensation, Sales
sales commission plan mistakes

sales compensationWe sometimes refer to quota-carrying sales reps as “coin-operated”, but it’s not actually an insult.  Charlie Munger, longtime vice chairman of Berkshire Hathaway, is quoted as saying “Show me the incentive and I will show you the outcome”.

Within legal and ethical limits, a good sales rep should do whatever puts the most money in their pocket.  That means it’s up to the company to make sure their associated actions and behavior are consistent with the company strategy.  But this is sometimes easier said than done.  This article provides insights and suggestions for this dilemma and relates to one of my five golden rules of sales compensation.

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 acquire.  Perfect, right?  Well, if the definition of “new account” just means the customer bought anything, a savvy sales rep looking to maximize their earnings will sell the easiest offering just to get the compensation associated with acquiring a new account.  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.

For example, let’s say you have an entry-level $99/mo offering that is intended to be purchased via your self-service channel (e-commerce, no sales “touch” involved) and a $499/mo offering that requires the influence and involvement of your inside sales team.  The savvy sales rep mentioned above might spend all of their time finding customers for the $99/mo offering because it’s so quick and easy to sell.  What if their sales comp plan pays them $500 for each new account.  Oops, you can’t afford to pay that much for selling the entry-level offering.

Because of this, you might need to decide to change the sales commission plan rules by requiring a minimum amount of revenue from a new account in order to qualify for the sales commission.  But if you make this change in the middle of a sales plan year (the period covered by the sales rep’s current compensation plan), you’ve just broken rule number two in sales compensation planning, which is to never change the rules in the middle of the gameRule 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 or you read this article before establishing your sales compensation plan and catch the issue before it’s ever a problem.  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 a commission amount equal to one month’s billings for any new account, regardless of the deal size.  With that, the sale of the $99/mo offering yields a $99 commission and the $499/mo offering yields a $499 commission.

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 money-hungry sales rep that only wants to maximize their earnings, regardless of whether their actions are bad for the business.  How might they go about doing that and where might they identify loosely-defined targets/rules or other “gray areas” to exploit?

Please don’t take any of my advice as suggesting it’s OK for a sales rep to behave unethically or illegally.  There’s never an excuse for that.  Instead, I’m trying to make it clear that you and your executive team are most responsible for ensuring the sales comp plan matches business objectives and desirable financial results.  If a sales rep makes $0.5M in commissions over the course of the year, the resulting impact to the company should be very, very positive.  In fact, in large companies, the top 10% of sales reps almost always earn more than the company CEO and everyone celebrates their contribution.

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 and nuances that your sales team needs a magic decoder ring to figure out if/when/how they get compensated (another one of my golden rules – keep it simple).

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