The worst sales compensation plan possible
We’re constantly thinking, talking, and writing about compensation plans (how to build one and which is our favorite for example)… In the ghastly spirit of Halloween, I wanted to write about THE SPOOKIEST COMP PLAN EVER! Fortunately for everyone, I’ve never encountered a plan this bad, but you might recognize some components from your own compensation plan in here! So let’s get started with this nightmare sales compensation plan. For the sake of example, we’re going to talk about Vandelay Industries, a (fictional) high-growth SaaS company with 25 sales reps and 10 SDRs.
Spooky thing 1: Too many components
Too many comp plans simply have too many moving parts. I’ve heard the adage that you can write a good comp plan on the back of a napkin/business card countless times and it’s a good place to start. I don’t think that any plan should have more than 3 different components (or Paths as they’re called in QuotaPath). If you’re pushing into 4+ different Paths, it might be time to simplify.
Vandelay Industries’ compensation plan has 8 components! I won’t list all of them here, but here are 4 of them:
- Earn 10% of any 1-year new business deals until you hit your quota, then 20% of any 1-year new business deals over 100% of your quota.
- Earn a flat 3% of any upsell deals for the first 6 months after a contract is signed
- Earn a flat 1% of any renewal deals but only if your retention rate is greater than 75%
- Earn a $500 bonus if you hit your monthly new business quota but only if you have closed at least 3 new business clients and you have $8k in upsell revenue that month
Spooky thing 2: Capped commission
There are very few times when a capped commission comp plan is acceptable. More often than not it is there as a failsafe to not overpay reps in case the organization didn’t do a good job building compensation plans. A cardinal sin for sales reps is sandbagging (holding back from closing deals this month to earn more money next month) and capped commissions are a major contributor to this behavior.
And of course, because this is a poorly designed comp plan, Vandelay Industries have a capped commission structure. Reps are only eligible to earn 2x their On-Target Earnings any given quarter. Any potential earnings over that are considered excess and aren’t paid out.
Spooky thing 3: Not attainable
There’s some debate about what percentage of a company’s salespeople should hit their quota every month/quarter ranging from 60-90%, but at QuotaPath we believe that around 75% of salespeople should hit their quota any given period. If it’s 100%, your quotas are likely too low, meaning the business is paying out too much in commission or not getting the most out of their reps. If it’s lower than 60%, quotas are probably too high and reps will become unmotivated and eventually leave.
Sales reps for Vandelay Industries have a $40k new business quota per month. On average, reps close $25k per month. Typically 5 of the 25 sales reps hit their quota every month — 20% of reps.
Spooky thing 4: Out of the rep’s control
For every [sales] action, there is an
opposite equal [sales] reaction. Okay fine, Newton doesn’t perfectly translate to sales, but my point stands: what a salesperson does should impact their ability to close deals and, thereby, make money. Many organizations, though, tie compensation to things entirely out of control of the rep! Of course, very few things are entirely in the rep’s control — you can’t 100% control whether a contract gets signed — but compensation plans should avoid paying on things entirely out of the rep’s control.
Vandelay Industries has a big marketing presence, which is very helpful for building pipelines. However, there’s a sticky component of their compensation plan that has driven some reps mad: they have to run 10 demos with marketing sourced leads per month or else they’re ineligible for any commission that month. The problem is that some months the marketing team only sources 5 demos per rep. In those months, a lot of reps go without commission.
Spooky thing 5: Doesn’t drive the right behavior
Sales compensation plans can be explained fairly simply: reps do what you pay them to do. If you pay your reps to close 1-year deals, they’ll close 1-year deals. If you pay them to close deals with enterprise clients, guess what? They’re going to target enterprise clients.
Revenue retention is a very important thing for SaaS companies, which is why some opt to pay reps a higher percentage on multi-year deals — they lock in revenue for longer. Not Vandelay Industries, though. As you can see above, they pay reps 10% for 1-year deals. They only pay 4% of revenue on 2-year deals though. So a $10,000 deal for 1 year will pay you more than a $20,000 deal for 2 years — $1,000 vs. $800.
Oh, also the CEO loves companies that start with the letter Q (we get it, so do we!) so Vandelay pays out a $1,000 bonus for any deal closed with a company whose name starts with a Q. In turn, reps spend way too much time on those clients and ignore the other 25 perfectly good letters of the alphabet.
Spooky thing 6: No way to track commission/quota
The final (and if you’re asking me, the spookiest) issue with Vandelay Industries’ compensation plan is that they lack the ability to track their commissions! A few reps have tried to build a spreadsheet to track their earnings and quota attainment, but it’s too complex, it gets out of date quickly, and it is very manual.
That’s where QuotaPath comes in. In under 7 minutes, you can enter in your comp plan variables in QuotaPath’s simple onboarding wizard. Our system handles even the most complex (no matter how spooky they might be!) and we do all the math for you, so no more human error or manual updates. It’s totally easy to set up and completely free to use. And if you’re thinking that your compensation plans might not be driving the results you want, feel free to email me at firstname.lastname@example.org