The Ultimate Guide to Sales Comp Webinar
Stuck on how to choose the right compensation plan for your business model? Need the basics on payout rates and earnings criteria? Unsure if you’re accidentally opening your company to potential lawsuits?
From basic comp math to legal compliance, there are a lot of moving parts to get right, and sometimes, you just feel like a cog in the comp plan machine. The Ultimate Guide to Sales Comp will walk you through the steps to move your comp planning process forward faster.
-Don’t blindly follow the status quo- think about your business model and sales motion!
-Set targets that are relevant to your team
-Be clear about Crediting vs. Earning
-Get your comp plan agreements out as soon as possible!
-Know the laws – standardize plans to minimize exposure
-Give visibility to your team about their compensation throughout the month
The Ultimate Guide to Sales Comp Transcript
Sanj Sanampudi (3:26):
Varicent Concert is a sales commission software that helps you give your team real-time feedback so they know how they’re pacing as they close deals, helps you create better comp plans and set smarter targets, and also helps you give reporting that helps your team visualize success and close more deals. Today’s Ultimate Guide to Sales Comp is kindly going to be moderated by Natalie Peled David. Natalie, can you introduce yourself?
Natalie Peled David (4:01):
Hi, Sanj. Hi, MSP fan world out there. I’m super excited to be here. I’m Natalie Peled David. I’ve been in B2B sales and leading go-to-market teams for the past 12 years, which for the purposes of our conversation today means that I’ve been the product of a lot of different comp plans. Victim is another word we could use in some cases, but I’ve also been responsible for designing many comp plans as well, and I think that brings a lot of curiosity to what could the best practices really be if we were to distill it down, how could we do this a lot better than we have. One thing I wanted to say, Sanj, just as a jumping-off point…
I think that historically I’ve always designed comp with really good intentions, but there’s always been some element of moving towards a new, great direction, but also some attempt to kind of course correct and iterate on the things that unintentionally kind of badly happened based on the last comp plan design. So, my hope is that for myself and other people who are tuning in today, we’re going to be able to walk away with some really good best practices. Like, what are the things that we can keep in mind so that we’re designing comp in a much more effective way moving forward.
Yeah, those are great ambitions. And as Natalie and I spoke about before, I am Sanj Sanampudi, general manager at Varicent Concert. Before starting Concert I was a CFO and head of finance and I was the one creating the brilliant yet evil spreadsheets behind those terrible comp plans that everyone gets and really kind of learned a lot about that whiplash you’re talking about of like ‘we rolled out this plan and it was supposed to be great’ and ‘these elements are great, but then we did this terrible thing in it’. So, let’s totally scrap it and start over. So, hopefully, we’ll be able to cut through some of that planning noise, but also help you understand how to run a good comp program. This is something that I totally did not understand before really focusing on comp. All right, let’s go into our agenda.
Perfect. So, what we’ve got coming up in this session is the purpose of sales comp, which at its core, I mean, this is basics, but it’s really to create this feedback loop, rewarding the right behaviors and linking those to performance outcomes. We’ll talk about how to choose the right compensation structure and essentially different comp structures may make sense for different business models. So, how do you find the right one for your org? In setting targets we’ll talk about how do people actually perceive targets? The psychology behind it and how you can use that to ace your target design. We’ll be giving you the 411 on legal compliance, make sure you’re clear on the legal standards that apply to comp structures. Hint, these are contracts and some of the requirements that you need to be mindful of. And then finally, we’ll wrap it up with some of the best practices and focal points that you can take into your comp planning sessions with your team.
So, the first section we really wanted to talk about the purpose of sales comp and at its core, Natalie, I think what everyone assumes about sales comp is you pay variable comp, because you’re going to get better results. But I don’t think anyone has really looked at the research. So, one of the things that we always do to kind of level set is from a study of thousands of companies that the University of Iowa did over a few years, they found that financial incentives led to an almost 50% increase in employee performance and productivity. So, putting the spotlight on you for a second, Natalie, do you think your comp plans made your team perform 50% better?
Not always as intended, not always.
You’re like, not better but differently. For me this was an eye-opening stat where I truly felt every comp plan I designed did not get anywhere near that. And it really made me think that me and many of my peers were doing something wrong. So, we worked with neuroscientists and behavioral psychologists to really understand what happens when you’re giving someone a commission. And at its really fundamental level, it’s a reward-based learning feedback loop. It’s the type of thing that helps you develop habits. And in order to develop any habit, and this might be a good tee-up to anyone who’s about to set new year’s resolutions, you need a quota or a target, you need a scripted set of behaviors of how you’re supposed to get to that target, and then you give yourself a reward as you make progress.
And if you have all three of those elements, you end up building the habits that get you to more repeatable and consistent performance. But really what we end up missing is like in that first element, how do we communicate these plans? How do we choose the right structure? How do we make sure we’re measuring the right things? How do we set those targets? And how do we tell our team what to do when they get those targets? The science behind it is also pretty clear.
So, on the left-hand side, when you give someone a target that is reasonably achievable, so, even if you had a puzzle on a desk in front of you, your brain starts releasing chemicals, you start releasing dopamine to believe that you can actually achieve this target. And if you’re totally disengaged from a target, you don’t see those red and yellow chemical release areas. You’re actually just not moved at all. You’re not motivated. There is actually a science of motivation of what happens in your brain. The other thing that we see is if someone achieves or receives a moderately challenging target, their blood pressure increases, because their body is physically saying, okay, now it’s time to move in that direction. Even if it is just like a brain teaser or something that is kind of sedentary by nature.
So, even just here, there’s a way to kind of activate people based on the target that you’re setting and how realistic people perceive that to be. That’s already right there going to lay the foundation for whether they’re going to engage with that target and whether they’re going to kind of be able to be motivated by it. Is that what you’re saying?
Absolutely. And this is where we kind of go into some of what we see early on and what we’ve discussed before is like, how do you even choose the right comp structure? And a lot of what I’ve seen in this work for a few years is people choose their structure off of a great blog post. It’s like, this is what Salesforce did for their first 15 reps, or this is what Jason Lemkin at SaaStr did. And those are really, really great, but they might not be applicable to you. So, we try to get people to think of two dimensions when they’re really thinking about what they’re measuring.
One, what business are you in? How does your company engage with customers and realize value? The second is what’s your sales motion like? What are people actually doing every step of the way? And based on those two elements there are actually a variety of comp structures that you can choose. So, we have a few noted here of whether you can use quotas or you just pay flat rates. Maybe you pay on a rate card because products have different margins and we’ll go through those in a little more detail.
So, the first one that we’ll talk about from our cheat sheet is a quota based component. So, a quota based component is typically one where as you achieve a certain level of attainment, you might have your rate continually increase or decrease depending on where you are versus your target. And the crux of quota based components is really this idea of accelerator tiers. So, this is where we see the best practices. People set two tiers below quota, so, reaching up to quota, and two tiers after quota. And it’s exactly what you were mentioning of the targets are really the thing that activate. So, what a quota based component really does for you is it gives you multiple targets. So, regardless of where someone is, they’re able to choose a target that’s relevant to them. So, if you’re an established seller, Natalie, maybe you’re gunning for tier four. If this is my first quota quarter, maybe I’m looking for tier one or tier two.
What are some of the super counterintuitive things that managers do even when they understand the principle of using tiers and accelerators with tiers?
I would say one of the things that I certainly was guilty of is setting that top tier at what I would describe as a totally crazy level. It’s like at 300% of quota everyone’s going to get 45% base payout rate. But there fundamentally isn’t any link to the behavior that gets you to 300% of quota. So, best case it does nothing for you. It’s just like some ink on paper and no one’s really motivated by it. Worst case, you have a few folks who sort of sell kind of bad deals or bad fit deals that get you there, but not in the way you intended. And then suddenly you have this problematic customer on your hand.
I would imagine it also just undermines trust, at the end of the day, for reps who are looking at plans that have these kind of magical numbers on them, like totally out of the universe numbers on them, it kind of makes you raise an eyebrow and say, does anyone really understand what business we’re in? Does anyone really understand the reality on the ground here? And to the extent that the answer to that might be no, that can really erode trust as well.
Yeah. I don’t think hope is a strategy that many people sign up for.
Well, one other question here just as it relates to tiers and accelerators, and I know you’re going to show an example later on of like what this could look like in practice as well, but what are kind of the keys when it comes to rep visibility? Because once you’ve got a tiered plan, you kind of need to understand where you are relative to the tier in order for those tiers to be meaningful in terms of your performance now. What are your thoughts on that?
And this is really where having more real-time visibility is important, because especially when you have a bunch of tiers or more complicated plans, reps are going to try to create that visibility for themselves. So, I know what pipeline my team has right now, and I know what tier I would end up on. And do you want me creating a spreadsheet to manage this on the side or do you just want me to focus on getting to that top tier and executing against pipe properly? I think the more elements to your comp plan you have, the more visibility is absolutely critical. Whereas, if you’re paying 10% of every deal, probably not that valuable. People kind of know where they’re going to end up.
The next component type is flat rate. And we see this commonly used, and this is really like that simple, simple plan that I just described. You’re paying the same amount based on volume, whether that’s account or a dollar amount, and you’re giving the same percentage against that. This is really kind of the soft reward for really transactional good behavior. So, one of the components that we have internally is the number of accounts you reach out to in a given month. And for each account it’s kind of flat rate, which helps people remember, yeah, I’m still doing the right thing. I’m setting more people up in sequences and personalizing more messages for them, I’m doing the right thing. So, it’s just a nice reminder that again builds that habit.
What we recommend for flat rate incentives is you’ll find that we recommend these more in business models that have kind of uncertain realization of the contract value. So, if you think about an advertising contract, the customer might sign a hundred thousand dollar agreement with you, but you only actually earn it if you deliver the right number of impressions. So, when there is that variability on whether you’re actually going to deliver the amount of value you contracted for, flat rate’s a really good idea for how you can kind of measure your team.
And the next one is sort of a play on flat rate, and this is the rate card. And this is really where we see product based businesses focus their efforts. So, if there is a different hardware component that have different margins for you, based on the parts that are used, or if you have a hardware plus support model, where maybe you have a high margin on support and a low margin on selling servers for sample, this is a place where, from a business perspective, you’re really matching the value of what the rep is selling to what the business is ultimately going to realize.
So, this is like a, essentially the flat rate, but with multiple different kind of applications of that flat rate based on the product.
Yeah, absolutely. And another application that you just reminded me of that we often see is if it’s kind of a SaaS business with a hardware component to it, where you sell this device, and then you have to have the software to support the device, and then you have a service model on top, each of those three elements has like a wildly different impact to the business and they might not be uniformly valued.
The next piece is really focused on those uncertain contract terms where you really want reps focused on the larger value and realizing the larger values of those contracts. And we see this a lot in advertising or in usage-based businesses or product-led businesses where we’re paying a residual. And the idea of a residual component is you’re giving a seller some pre-set amount of time to realize the value of the contract that they sold. So, maybe I get a contract signed for $100k in theory now, but as they’re using it, I’m going to give them maybe two years to use it. And at the end of the two years, I stop getting paid for this deal. If they go over $100k I can be over attained. If they’re under, I’ll under attain, but there’s no kind of set cap on it.
On this one, any words of wisdom that you can offer as it relates to target setting or quota setting or target setting when it comes to this kind of residual or unpredictable usage?
Yeah. A lot of what we see on these residual components is setting targets around kind of a number of customers tends to be kind of correlated with more success overall than setting targets around the customer utilization. So, what we’ve anecdotally seen through data is that if you’re paying a high residual rate, people tend to focus on like that really big deal in making sure that they’re using it up and it’s kind of deferred income. You can make a pretty good amount of money by someone you sold 18 months ago, because they just started using the service well. And if you build your quota around that value, it kind of takes someone’s eyes off of what they need to do right now with their pipeline.
So, essentially then the idea here might be then to set, let’s say, monthly or quarterly activity-based targets like activity for a number of signed or live contracts, something like that. But then also have this additional component of residual payouts over time, based on a straight percentage of revenue, something like that. Is that right?
Absolutely. Yep. You got it. So, then the last one we often see is a target bonus and we see these most in advertising SaaS and usage-based model, but this is basically you reach some sort of attainment level and you get one payout. You’re not paid per transaction, it’s just, you get to this level and then you’re paid. Commonly think about in SaaS or any model like a sales rep hits quota and they get a $10,000 bonus. Or in SaaS, a CS team has a 90% gross retention rate and they’ll get a $5,000 bonus each quarter. So, it’s not necessarily tied to one specific deal, but it’s tied to cumulative performance. And these tend to be kind of from a habit formation standpoint, the least effective types of rewards because they’re really disconnected from a concrete action I can take. It’s an accumulation of like, I have to do 150 different things to get this aggregate result. And it becomes a little bit more opaque.
How would they work then, you talk about it’s based on the cumulative performance of a person, but could this also work in like a team setting? In other words, could this be the lever that maybe doesn’t drive individual behaviors, but therefore can contribute to more kind of a team win, team unity, team pride?
Yeah, if you have like a company incentive tied against aggregate performance and everyone’s kind of aiming for it. And they’re kind of trying to think of, oh, me as a collections person. What’s a little thing I could do to help contribute towards this goal. It keeps the goal front of your mind, but you don’t have a scripted behavior of how you’re going to contribute to it, but it might kind of nudge you in the right direction to help the team out. So, we can see they’re more effective there especially if there’s a lot of integration and a lot of moving parts and it’s really kind of a rah-rah, let’s do this together kind of incentive.
All right. So, we got to the place where we’re figuring out what do we want to measure. What are the types of things that we really want to talk about with our teams and how do we want to measure them? How are we going to structure their plan? Now we’re going to talk about setting targets. And this is the part that I think we talked about a little bit, but it’s really the part that no one ever tells you.
So, there is a large part of behavioral sciences around how you get people to do things. And probably one of the biggest levers is, again, through targets. But how do you find it target that actually would get someone to move, to get their brain to start releasing dopamine, to increase their blood pressure? Behavioral psychologists call our measurement of how hard a target is to achieve psychological distance. And there’s a theory called construal level theory that underpins how we think about psychological distance. It basically says we look through four lenses of whether we think a target is possible or not. And these aren’t distinct lenses. These are all contributory. So, you don’t have to optimize across all four of these dimensions. You might only need to optimize one or two to see a material impact in results.
So, the first one we’ll talk through is social distance. This is the pre COVID OG social distance, which basically is trying to know, am I in the in-group or am in the out-group? And what you’re measuring with social distance is how many people are actually in the in-group? And if everyone else is in the in-group, it probably means I’m doing something wrong. So, the key takeaway from me here is we keep seeing year over year the number of reps hitting quota keeps declining. And it’s basically declined, I think, since 2013. So, when you have less than 50% of your team hitting quota, it’s a coin toss. It’s not a big deal that you didn’t hit your target. Most of the team didn’t hit their target. When you have 70-80% of your team hitting target, suddenly you’re starting to ask the questions of like, oh, am I doing something wrong?
In other words, if you’re the rep, if you’re in that outside group and like 70 or 80% of the team’s hitting target, and you’re not, then suddenly that’s not just a reasonable potential existence. That’s like, all right, something’s got to give, because I’m not in the right group here.
Right. It feels more personal. And what we find is when you’re kind of in that situation where you have a large team hitting quota and a few outliers, those people who aren’t, as a manager, they’re going to be more open to you for coaching and feedback. As an individual they’re talking to their peers who are hitting their targets and trying to learn the tactics from those peers. They’re just ready to learn in a different way.
The next piece we talk about is experiential distance. And this is really, have I done this thing before? And what we see as a great application of experiential distance is again, putting in those accelerator tiers. So, if I’m a new rep and I just hit tier one in my first quarter at a company, the next quarter I’m going to aim for tier two or tier three. So, you never want to stagnate or fall backward, you’re always aiming for the next thing. And that creates more activity, more hunger, more opportunities for people to learn from each other.
And then this also kind of to your point becomes less of like a, did I didn’t I. It’s not a win-loss. It’s a, how much better can I be? How great can I make my performance?
And even if everyone else is at tier four, you have the social comparison, but if I’m at tier two, it gives me something in the middle to aim for that feels more relevant to where I am at.
The next element is temporal distance. And this is really by shortening your measurement periods. And what we found with our benchmarking report with Modern Sales Pros earlier this year is that if you shorten quota periods, you actually see a higher attainment level. So, if you see here SDRs who are measured monthly versus annually, you have a 43% quota attainment rate instead of 30%. AEs, who are measured monthly versus annually, you have a 69% quota attainment rate versus 45%.
And part of why this might happen is shorter quota periods give you more opportunities to reset. If you find you set this really unachievable target, you can recalibrate pretty quickly. Another kind of critical insight. And I know you have experience across B2B. this holds true even if you’re selling really large enterprise deals. We’ve seen enterprise sellers who have monthly and quarterly quotas perform far better than enterprise sellers who have annual quotas. So, really goes against that kind of sales psychologic of, oh, these are longer sales cycles. We need to increase the quota period.
Yeah, I think earlier in my career, there was definitely this, we’re setting a goal for the end of the year and we’ll talk about it in January, February, March, April, May, but at some point in the year that annual target you’re either on track for it or you’re not. And then it either remains relevant or doesn’t remain relevant. So, it can also kind of dissipate and fall into kind of oblivion because it’s been farfetched all year. And because at some point it’s just been kind of determined for you or not. Yeah, we’re going to hit 3 million by the end of the year. Great.
So, then the last one, and this I will say is the most blunt one is spatial distance. It’s actually just lowering the nominal target. There are a few ways that you can leverage this in not so blunt a way, but it is highly impactful. We worked with a SaaS company here in New York who had 30 reps and only one of the reps was hitting quota in a given month. We plugged it into our algorithm. It recommended that they dropped quota, they dropped quota. And over the next three months, their sales increased by 15% nominally. It’s not quota attainment. This is actually people sold more because the $42.5K target was more relevant than $50K and they didn’t do anything else.
So, they just like arbitrarily changed this arbitrary number and then saw a higher result. But kind of the easier way to gain spatial distance is if you typically are going to set million dollar quotas for your AEs, just set it at like $950,000. Use the basic pricing theory that you’re already applying to your AEs, it’s the same thing. When you’re pricing a house or a car, you’re kind of lowering below these milestone thresholds because it’s more approachable; same logic for targets in your sales team.
I love these. When I saw kind of these principles the first time you shared them, some of it is pretty fundamental or basic we might call it. But I don’t know that as a manager, when you’re designing comp you have these top of mind. And these are kind of simple ways that you can look at what you’ve built and then just consider simple adjustments to make it more approachable, more motivating and actually have the impact that you’re looking for, which is to drive better performance out of your team.
Yeah. And I think what, for me, has been sort of the biggest learning lesson has been, I would always think of one or two of these at a time, but I didn’t actually have the framework to think about the target holistically from all of these elements. And if I optimized one, then maybe I could let go of a few tiers. If I got the timing right, maybe I didn’t need that many tiers, or if I got the quota number right, maybe I didn’t have to have 80% of the team hitting quota. I could have 70% hitting quota. So, it’s a balance of them. It’s not that each of these needs to be perfect. And I think I often would let perfect be the enemy of great.
I have a quick question for you here, Sanj, before we go on to the next topic. I think that there’s almost this running joke among sales professionals that any anticipated change in comp is a bad move. It’s almost like a meme that salespeople are like, oh yeah, the comp structure’s changing. I’m sure that’s going to be great for us. So, people are primed to anticipate that the change is necessarily negative. It’s going to be worse for the rep. It’s going to be based on a calculation that’s harder to achieve. Are there any suggestions that you have for how to, because people who are on this call, presumably everyone’s here because they want to do a better job. The iteration is intended to be more favorable, but any suggestions just on that, how to combat this anticipatory negativity that people might have?
So, we’ll go into one thing that we recommend showing your team when you’re rolling out new plans and it’s really showing them the old payout curve versus the new payout curve. You were supposed to be paid this way. Now you’re going to be paid this way. This is why we made the change. This is the behavior that we’re expecting you to do differently, because in many cases, when you’re making these changes, it’s kind of not the same playbook. In a lot of ways your strategic plan of how you’re going to get to your number changes year over year.
And I think the gap that most people have missing is explaining, we change the plan so you do this thing differently and then this is how it will impact your pay. Another thing we do in our platform and work with our customers on rolling out is we create a test plan where you can just show someone what they would’ve made, which is basically the first thing I think every AE does after they get their new comp plan document. They ask a friend who’s really good at spreadsheets to create a new spreadsheet for them. And then they see what they would’ve made.
So, in the next section, we’re really talking about comp plan agreements. And this was super revelatory to me, because I didn’t actually know that while we had people sign things, I didn’t know how important they are and how kind of complicated the labor laws around commissions actually are. So, the first warning I’ll give everyone is that labor laws are wildly different from state to state in the US. And they’re wildly different from country to country and regions within those countries as well. We’ve calibrated most of our best practice around kind of California in New York. A lot of California’s labor laws sort of set the precedent that is typically adopted. We see five-ish years later by every other state.
So, the basics of comp plan agreements. One, in every state comp plan agreements need to be in writing and signed. It’s kind of like the non-negotiable of comp that they are formal agreements because it is a financial transaction between two parties. The second point, and I’m very guilty of this, is that the plan is supposed to be distributed before it goes into effect. So, all of you who are on this call whose new quota period starts January 1st, you have about 25 days left to get these documents out.
If you don’t get them out before the new plan period starts, you’re legally obligated to pay the higher of the old plan or the new plan rate. So, especially if you had a new product and you were paying it say at 18%, and now the product is kind of a set part of what you’re selling and your base rate starts at 8%. You will want that in a document, because anything that that is sold until the new plan is released is going to be subject to be paid at that higher rate. The last element is that your comp plan agreements are supposed to explain how a rep can achieve their variable on-target earnings. And that means you need to spell out their quotas and targets and the payout rates that are applicable, and that you need to spell out when a transaction is credited versus when it’s earned
Lawyers, the worst, right? So, example of base payout rates. So, very simply your payout rate should be your variable on target earnings or OTE divided by the quota amount. So, in this simple example, I have variable OTE of $100,000 and I have a quota of $1 million, which means my base payout rate is going to be 10%. With accelerators, this gets much more complicated in why you have to spell it out more explicitly. So, say I have an accelerator for the first 50% of my quota and the second 50% of my quota. In the first 50% I want to put in a decelerator where they’re only paid 8%. So, 500,000 x 8% would be I’m now paying $40,000 of OTE for that first $500,000.
Their target is actually supposed to be $100,00. So, the second portion needs to pay out $60,000. So, this second $500,000 needs to pay out $60,000, which is $60,000 divided by $500,000, which is 12%. The more tiers you add on, the more complicated this gets. There are kind of mathematical mechanics of how you can run tiers a little bit differently, which also make this more complicated. So, it’s really, really important that you spell it out. And if you spell it out well, people will have fewer questions. A big piece of what we see, and I’m sure you’ve seen Natalie, is people just don’t understand their comp plan.
Yeah. And the other thing though that I see is that when HR kind of comes in and says we’ve really got to make these contracts airtight, and we have to spell everything out. I’ve also seen the pendulum swing in the other direction where it becomes so heavily kind of laid in with legalese that, that’s the other part. It’s like hardcore terms and conditions and reps can also be like, okay, I need a lawyer to read this comp plan? It must not be good. So, again, there it kind of undermines the accessibility of the plan itself in either way, if it’s not understood or if it’s so kind of intensively defined to the point of being like a contract, like heavily contracted.
And that’s a great point of how you communicate to reps, too. Show them the summary of what they’re paid on, what their rates are upfront. Don’t make them dig into page eight or nine. Don’t make them do their own calculation of what their accelerator table needs to look like. Do all this for them, spell it out very clearly and put the terms and conditions and all the legal language on the backend. It’s still important, but someone’s not searching for kind of the punchline.
So, the next piece we want to talk about is crediting versus earning. And these are two distinct topics. Crediting is sort of at the company’s discretion. You can kind of do whatever you want, but it’s really supposed to match to when quotas retired or when on this transaction goes towards your target. And the ‘when’ of it is really important because from a psychology standpoint, you typically want the ‘when’ to be when they’re they’re finished selling.
So, when they’ve kind of gotten someone over some major milestone for a BDR/SDR, that might be like on the meeting date. So, when they actually agreed to a meeting for a sales rep or a CS person, it might be on the close date of the deal. Earning on the other hand is when a transaction is confirmed. So, legally when a transaction is considered earned, you’re supposed to pay it out within 30 days. So, this is a really, really significant labor law where you can be faulted for unduly withholding compensation if you’re not paying these out quickly. The other part of earning that is legally defined is it has to be linked to either your job description or to transaction verification.
So, a job description could be I’m a seller I’m supposed to close, therefore my crediting is on the close date and my earning is on the close date. Another way you could spell out the job description is I’m actually supposed to get people signed up and make sure they use the platform, which then means earning can be tied to usage and utilization. So, then you can tie to billing date or payment date or more elements. And where crediting and earning look very different is really kind of in how it is paid out.
So, crediting means, theoretically, my payout rate times this transaction amount means that theoretically I’m going to be paid $1,000. Earning means if I’m paid on quarterly billing, I’m getting paid out in $250 chunks every quarter. And this all ties back to kind of the core criteria for are crediting and earning. And it’s about being explicit about what transactions give you credit, who needs to be tagged on the transaction, when do you get credit, when is it earned and how much credit are you giving? And oftentimes I think we create these genius comp plans that don’t fundamentally have the data to execute them.
Yeah, that’s one that I see a lot where there can be great ideas about exactly how to design comp, but then they can kind of break when it comes to execution and operation and understanding what information would we need where, confirmed by whom at every point in time in order for this to be like a viable option. And at times it literally requires four new project people to undertake an entire new kind of maintenance for an entire new set of data that doesn’t organically exist in the organization. It’s not kind of on the workflow path of any other person just to be able to operate this. I assume using kind of professional tools for compensation management can help at this.
Yeah, but even without a tool, if you actually, if you tell your team what they need to fill in, they’re probably going to fill it in. To your point on what needs to be in and can be out. You do not need to include any discretionary bonuses. And these are elements of your comp plan that pay over and above what their variable on target earnings is.. So, any MBOs or Kickers or SPIFs that you’re rolling out can totally be like an email off the paper. They don’t need to be significantly documented in a contractual way. Your finance team probably needs some elements to make sure that they can be audited, but they don’t need to be contracted with your employees.
Yeah. This was one I shared with you. There was some heated discussions at one of the companies I worked at just about this, where in the interest of kind of documentation, it almost became holier than any official need for documentation to the point where it almost kind of hamstrung the business, because you really just couldn’t act in a timely manner as a manager. You kind of got handcuffed by a lot of kind of bureaucracy that didn’t need to be there.
Right. If you’re trying to roll out a short-term incentive test, you don’t have time to create plan docs for that. That’s not the purpose of it. You want to try something tomorrow.
The last little bit we have is on other terms and conditions or extraordinary cases. You’re going to make sure your terms and conditions talk about Clawbacks. So, when reps return commission, and that’s typically if a customer never pays or a deal never happened or if a customer terminates early before they actually use the service at all. You’ll want to talk about Windfall Deals and Bluebirds. And these are kind of two of a similar set where there are transactions that you kind of didn’t expect. And they kind of came out of the blue, but if they’re resulting in significant payouts, you’ll want to carve them out from the rest of the deal, mainly to protect the rep. Because we’ve seen cases where people are getting six-figure commissions off of certain transactions, and then something bad happens to the transaction where the value goes down. And how do you Clawback $100,000 from someone?
And then the last is family leave. I think especially now when everyone’s remote and balancing more challenges with their families overall, really kind of be more deliberate about what happens in various cases. And that kind of will go into our recommendations here where really have distinct terms for family leave. I know we were always reactive in the places I was like, oh, someone needs to go on maternity leave right now, what do we do with our comp?
Which also then puts kind of the burden on that person who’s kind of experiencing whatever could be a celebratory family leave situation or not, but it puts the burden on that person to kind of negotiate their own best terms in that moment, rather than having an organizational policy for the whole thing.
Yeah. And I mean, regardless of what a family leave situation is, it’s stressful. So, adding more stress to that person when they’re trying to figure out how to hand off and like kind of wind down correctly is not great. We’ve also seen that this can be a great tool to increase the diversity of your team. Having some certainty around this will hopefully bring more women into the fold because they’ll understand that you’ve actually thought about where they might be in their lives. Another element is don’t have one-offs for certain reps. So, there’s always that rep who was there first, who gets their own plan. And then the rep that was there second kind of has their own. And then you start getting in the habit of each rep is slightly different than the other. This can open the company up to significant exposure for discrimination lawsuits. So, standardizing how your plans work across the team is very important.
And I know we had a question about this specifically from the audience. So, I’m glad that you addressed that. I think the question or the context for the question, it was less phrased as one-offs to my understanding, but the question was indeed, what’s the perspective on consistency between sales reps that this person is a new sales leader and notice that some of their sales reps had target bonuses while others don’t. This person feels it’s really important that they modify this moving forward to ensure they have kind of consistency across the team. Does everybody need to have the same plan or can there also be some role-specific differences, but again, tied to the role itself?
Yes. If it’s tied to the role, it can absolutely. It’s totally fine, but you have to have a clear distinction with the role. Usually need to evidence it as a different title and or a different plan. It can also be customized by territory, but again, you kind of have to have those elements usually in the title, but it’s really making sure everyone who you’re calling a BDR has a very comparable plan. Their targets can be different based on the regions they’re in, but the structure of how the plan works should be the same.
I think there was another question on withholding commissions if they don’t sign the agreements. Very, very important. In most cases you cannot withhold the commission, even if the plan doc isn’t signed. So, you can do true-ups, again, I think Garrett rightly pointed, you should definitely check the laws in the places you’re operating in. But in many places we see that you are not supposed to withhold if they haven’t signed the plan doc, because then the plan doc is seen as somewhat invalid because you’re kind of forcing them to sign it in kind of a hostage circumstance. We’re not going to get all this money because you didn’t sign. So, you better sign now.
So, the last point is on communication. And this touches upon what you were mentioning before, where we try to make sure people see sample calculations for people who are going to make way more or way less under a certain plan, explain why it’s happening. What are you doing right? Or what do you need to start doing in order to kind of close the gaps? And really don’t keep it a secret, show the payout curve. So, in this case, you can see the dark blue payout curve is showing a very linear curve. The brighter blue shows we’re going to pay you less and lower cases, but we’re going to pay you a lot more in higher cases. And that’s the kind of thing that helps a rep understand more visually. I can explain the words to you, but now I really see what you’re saying. And that kind of takes the communication pretty far.
And then kind of last takeaways. Again, like we started off with, Natalie, don’t follow the status quo. Really build a plan that’s right for your business and your sales mission. Set the targets that have the psychological relevance to your team, shorten the psychological distance, use your targets to actually motivate them, be clear on those data elements of the crediting versus earning the what, who, when and how much. Get your comp plan agreements out. Do not be Sanj.
I had notoriously one year gave out comp plan agreements in April when we were on a calendar year. So, we basically lost a full quarter by letting perfect be the enemy of good. Know the laws and try to standardize your plan to minimize exposure and make sure your team has visibility throughout the month. The great kind of struggle of comp is you’re supposed to use this for motivation. This is supposed to help someone know if they’re doing the right things and if they’re on track. And by keeping it a black box, you’re not actually realizing the value that gets you to a 49% performance increase. So, not any more questions.
I am curious to see if there’s anything else that our audience wanted to ask, but Sanj, this has been, I’ve learned so much from you from this session and from speaking with you. And I think I wish that I’d had you as a resource other times that I was planning comp plans. So, what are some of the ways that people can get some more information if they’re curious to learn more from you or see examples of best practice or communication, cheat sheets, things like that?
We also have the Ultimate Guide to Sales Comp on the website, which we’ll follow up with after this as well. And we have a webinar we did last year with Modern Sales Pros called You’re Setting Quota Wrong. So, you can view that and kind of understand more behind the psychology and the tools… the challenge of comp is it’s always a balance between, like what motivates your team and what are the company’s goals. And there are tons of opportunities of overlap, but we usually let one side overweigh the other.
Transcript has been edited for length and clarity