5 Critical Sales Comp Plan Pitfalls to Avoid
Sales organizations live or die by the quality of their sales comp plans.
A poorly designed comp plan will quickly stifle sales force engagement and hinder the company’s ability to reach its goals.
When a poorly designed sales compensation plan is in place:
- Business objectives are not met
- Effective forecasting is impossible
- Salesperson morale and engagement are negatively impacted.
If a company invests in optimizing the design and execution of its comp plans, it can focus on what matters: driving revenue, growing market share, and maximizing shareholder value.
When a well-designed sales comp plan is in place:
- Incentives are closely tied to company objectives
- Rep payouts are optimized to maximize ROI
- Recruiting and retaining top sales talent is maximized.
Ready to make the most out of your comp plans? Avoid these mistakes in the future:
1. Lack of focus on engagement
If your sales force doesn’t engage with your comp plan within the first few weeks, they will likely struggle to hit targets over the rest of the year.
There is a psychological compounding effect when a rep falls behind on objectives early in the year. They are more likely to see their target as unattainable and quit their job or disengage completely. That means that when setting goals for your comp plan, you must consider whether reps will feel confident that their objectives are attainable in the short and long term.
On top of being in a constant state of “playing catch-up” and increasing rep churn, organizations with low comp plan engagement early in the year will be forced to layer on additional bonus opportunities or SPIFs to reignite engagement. However, these bonuses are typically incremental to the payout budget, negatively impacting profitability and sales leadership credibility.
To avoid this issue, organizations should focus on the following:
- Increasing transparency about the quota setting process
- Seek input from sales reps on plan design. Reps are more likely to accept a plan if they feel a sense of ownership.
- Ensuring proper quota weighting to match seasonality, i.e., the first half of the year isn’t overburdened or misaligned with buyer patterns.
- Get feedback early in the year to measure understanding and initial sentiment towards the plan and quotas, tranches etc.
- Hold regular training sessions throughout the year to re-emphasize how reps can maximize earnings
- Promote and celebrate salespeople who have figured out the plan, and ask them to explain what they did to other reps
- Take engagement surveys throughout the year to measure changing sentiment towards the plan.
- Take an engagement survey at year’s end to measure the plan’s overall effectiveness.
- Invest in technology that enables reps to understand the next-best action or deal to pursue to maximize their earnings.
With all variables considered, the most impactful thing organizations can do to increase engagement is to set realistic goals with quotas based on data, and get buy-in from reps before the new comp plan goes live.
2. Overly complex design
If you can’t fit your comp plan on a business card, it’s probably too complicated.
Complex plans make understanding plan objectives exponentially more difficult—and sales reps can’t execute effectively if they don’t understand what to do to get results.
Low rep engagement results in low quota attainment, which causes the company to miss its targets. That means reps won’t hit their expected earnings, increasing their likelihood of leaving.
Even if a rep does hit their number, the plan’s complexity may lead to errors and commission disputes, which will naturally have the same consequences: low engagement, a loss of trust, and increased attrition.
Complex plans with competing priorities also make it challenging for organizations to connect variable pay (costs) to outcomes (revenue). That leads to inefficient payout allocation, inflated costs, and missed revenue opportunities because the complexity obscures any financial forecasts.The simpler your compensation plan design, the easier it is to communicate to sales reps. The clearer the path to reaching their expected earnings, the more motivated reps will be — and the more likely they will hit goals. #salescomp… Click To Tweet
The best way to overcome complex design is to reduce plan dimensions:
- Fewer plan components
- Fewer exceptions
- Fewer metrics to be paid on
- Simplified math to determine the payout amount
The simpler your compensation plan design, the easier it is to communicate to sales reps. Reps are more motivated because they have a clear path to reach their expected earnings, and internal administrators make fewer mistakes executing it, reducing disputes and increasing admin efficiency.
3. Lagging on positive feedback
To stay motivated by an incentive plan, sales reps need feedback that connects their behavior with their results.
When you delay sharing information about the business results that impact their commission, sales reps will begin to lose patience and disconnect from the plan. As their patience wanes, they lose faith in the data that supports their payout, and in extreme cases, lose trust in their employer altogether.
Delayed data inputs present issues in sales organizations with value or usage-based pricing models. When usage is uncertain, it is not uncommon for reps to wait weeks or even months to see how much commission they’ve earned. Without any visibility, representatives cannot make any strategic changes to their approach or behavior. Short-term milestones (aka payouts) are shown to improve adherence to long-term goals, even when they target the same outcomes.
To give reps the right information, at the right frequency, at the right time, organizations should do the following:
- Invest in infrastructure to report results with high frequency, ideally daily
- Find creative ways and places to source data
- Focus on things you can measure accurately and quickly.
Addressing this issue comes down to investing in the right sales compensation software and thoughtfully implementing a framework to communicate results to reps immediately.
4. Assuming your plan is working
Considering the amount of money spent on sales compensation every year, it is astounding how little most organizations invest in evaluating comp plan performance. The only way to improve your plan is to assess its performance regularly and make changes to course-correct quickly.Considering the amount of money spent on sales compensation, how little most organizations invest in evaluating sales comp plan performance is astounding. #salescomp #icm Click To Tweet
Most companies delay plan design until the new year and repeat what they did the previous year because “it worked,” without evaluating how well it worked or if it fulfilled its potential.
Few companies are collecting data on the performance of their sales compensation plans, and even fewer are keeping consistent tabs on how incentives are impacting sales force effectiveness and productivity.
Does your organization have the data to say with certainty what changes are needed to drive better outcomes? And if so, are you monitoring and leveraging that data to make decisions?
Failing to assess plan effectiveness and ROI properly can lead to wasted company expenditure. If you’re spending “$XXXX” on rep commission to reach “Objective Y,” you may be spending an oversized amount for little return, depending on Objective Y’s profitability.
Let’s look at a real-world example. In 2021, an Enterprise SaaS organization had unknowingly designed an incentive plan that failed to motivate reps to pursue multi-year deals. The result was that representatives were spending a disproportionate amount of time pursuing annual renewals instead of net new revenue. The organization was overspending on sales compensation and failing to hit several KPIs but was unsure which area of the comp plan was causing these issues.
Forma.ai’s analytics module flagged the issue to management, along with a suggested improvement. Using Forma.ai’s collective data model to forecast the impact of several new incentives, the company quickly implemented a term-length “kicker” to reward reps for closing multi-year deals. Within three quarters, multi-year contracts had increased 161%, which supported long-term growth financial stability and grew the company’s valuation. Click here to read the full case study.Does your organization have the data to say with certainty what changes are needed to drive better sales outcomes? If not, why not? If so, are you actually leveraging that data to make decisions? #salescomp #sales Click To Tweet
To keep yourself honest about plan effectiveness, remember the following best practices:
- Keep plans simple and measurable.
- Tie objectives to quantifiable outcomes like revenue or profit.
- Limit measuring on objectives that correlate with one another, i.e., if you do well on Objective 1, you shouldn’t automatically do well on Objective 2
In today’s competitive landscape, hitting your targets is table-stakes. What works today may not work tomorrow, so it’s essential to stay realistic and objective towards your comp plan to mitigate any fallout.
5. Capping commissions
It should go without saying, but we’ll say it again nonetheless: Stop capping commissions.
A plan without caps communicates to your team that you will pay for performance and shows faith in your reps, goals, and plan design. That trust is crucial to rep engagement.
Limiting a rep’s potential earnings creates more problems than it solves. Most companies think capping commissions is acceptable because it only penalizes a small number of high-performing reps and mitigates organizational risk. They fail to realize just how valuable those top-performing reps are to the organization. When your top 20% of sales reps produce 80% of revenue, capping their commission restricts the entire organization’s growth.
The only thing worse than capping commissions is capping them retroactively after a windfall sale, which is the fastest way to lose your top sales reps.The only thing worse than capping commissions is capping them retroactively after a windfall. That's the fastest way to lose your top sales reps. #sales #salescomp #salesmanagement Click To Tweet
The capping of commissions also signals to newer reps that their growth is limited, which increases the likelihood of early turnover. Instead of capping commissions, do the following:
- Set commission rates carefully, accounting for windfall scenarios, and ensuring you tie payouts to a defensible ROI
- If a windfall occurs, wait until next year to make plan changes to curb payouts (take the hit now and correct for the future)
- Decelerate their commission rate back to their base rate beyond a certain threshold.
In the sales world, reps thrive on the freedom to earn. Never penalize outperformance — over-reward it.
Everybody makes mistakes
In a role as competitive as sales, you can’t afford to make mistakes. Let’s breakdown this piece down into something you can download and put in a deck.
Addressing these mistakes and avoiding these pitfalls ultimately comes down to one thing: Getting a clear picture of your performance data.
The ability to access transactional data in real-time, in a format you can easily manipulate, is the only way to identify where you are making errors and determine how to adjust the plan to improve business outcomes.