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I’ve written a lot of checks to sales reps over the years (both big and small). Here are ten pillars to apply to your own sales comp plans. They are focused on private companies between $50M and $500M in revenue, but help at any stage.

When it lands in their hands, they must be able to clearly understand how their efforts link to getting paid.

They shouldn’t need a spreadsheet to run a scenario. It should just make sense.

Not only that, they must be able to explain it to other reps.

If you think about your org as a series of concentric circles, with the center being the management team, you don’t want the comp plan to lose some of it’s “understandability” as it travels through each sequential layer. It should have the same oomph when it hits the rep who has their feet on the street.

Speaking of understandability…

Most sales comp plans have multiple components. For example:

I’ve lived this scenario, and the earned secret is sales reps aren’t going to get out of bed for 10% in the morning. It’s small enough that they will think they can make it up through the first two elements. And it isn’t large enough for them to believe overachievement will lead to an outsized impact on the aggregate plan.

You must be very honest with yourself as to how important each component is to the company’s overall strategy. I’ve made the mistakes in comp plans where we really really cared about something, but it didn’t show up that way in the weighting, because we were too afraid to change up the old way we’ve done it. We let inertia outweigh our desire to achieve something new. So as a compromise we make it more of a “kicker”.

Halfway measures get halfway results.

To get more specific, in my case we were a B2B marketplace where we earned a % of each transaction. Our goal was to land as many net new shops as possible and ramp their ordering behavior. In our model the supplier paid us a take rate, so it was free for the shop.

And then we introduced a SaaS module for the shop to purchase. We were layering on a subscription offering that charged a different part of the ecosystem.

Reps were compensated based on

We started off making the weighting 45% (new shops) / 45% (ordering) / 10% (new SaaS product).

We got SaaS crickets. We moved it to 40% / 40% / 20%.

Minimal movement.

Finally, we said damn the torpedoes, let’s make each component 1/3.

BOOM. SaaS started flowing through the door faster than we could count.

The problem wasn’t that the customer didn’t want the product, it’s that the sales reps could still overachieve by just focusing on landing new shops and ramping their spend. We had to make the new component meaningful enough (from both a reward and penalty perspective).

I’m a big fan of annual plans. Some companies get cute with creating quarterly quotas. The absolute worst version of this is quarterly, discrete quotas that reset each period.

The first thing wrong with this type of set up is it incentivizes the rep to build up a pipeline that they can knock down all at once in a single quarter so they can get into accelerators and blow the doors off, vs spread it out linearly. In this scenario you risk being under budget as a company on annual plan, but over budget on commission, as people manipulate the accelerators.

No body wants less revenue and more sales expenses. But, it’s a symptom of the plan.

The second mistake it makes is you end up rewarding reps in one period for work they did in another. If your quotas reset each quarter but your average sales cycle is seven months, you break the all too important linkage between effort and reward.

It’s totally OK to have soft goals to keep reps on track, and show them a “path” to hitting their larger annual number. This is good because it helps them “chunk it up” into more digestible patches (it can be daunting to stare at a $750K quota and you have to sling $15K deals to get there… much less scary to see it laid out in $188K chunks).

Net net, annual quotas, in my opinion, align company and rep incentives over a medium term time frame that cuts out a ton of the short term bullshit.

Two other good things an annual plan does:

The quota and deal velocity need to align. While the quota amount may make sense, there may not be enough hours in the day. I call this sales rep math.

I once gave a guy a quota that in dollar terms made sense, but it didn’t take into consideration that each new customer needed to ramp (which took 9 months to hit terminal velocity).

So in order for him to actually hit the goal he’d actually need to close 175% of the deals we thought.

He could totally do it, but he’d run out of time.

And to force him to fight the laws of physics was unfair.

Most spiffs don’t work. Many times they end up being a mechanism to just pay reps more money for doing the same work they were going to do anyway. Unless there’s a way to truly change either the time reps spend (like call blitzes after hours) or what they sell (adding another product to their arsenal as an upsell), spiffs usually don’t result in meaningful differences to your overall performance.

So if you run sales contests or kickers at the end of a period, they shouldn’t be because you need to fundamentally shift the outcome at the company level. Ideally they are used to move the middle of the pack up and through the median.

Now, why do I say the “middle”? The reality is your top performers are going to over perform. They are all stars. Full stop. They don’t need a Spiff to get going.

And your bottom people aren’t long for this world anyway.

But if you can get 5% to 10% incremental achievement out of the middle of the pack, that’s a game changer.

Where spiffs go wrong is when you aren’t paying for incrementality. You end up just paying your top performers more money for what they are already doing.

They also get bastardized if they are so large that a rep who sucks at the normal stuff can just hone in on the spiff and use that to stay in the game. You don’t want to use spiffs as a life raft for those who are meant to drown (sorry).

As a check, Spiffs should never make up more than 10% of your overall commission stack. And even that’s generous. Ideally they represent single digits of payouts.

Finally, you don’t want to train people that there is a new spiff each month or quarter, and they hold off on what they have in their pipeline or backlog because it will be better paid in that spiff mode.

Spiffs should be few and far between, not needle movers to the overall comp plan, and extremely targeted to specific activities.

The best way to not hit your Q1 goals is to wait until March to hand out plans.

Ambiguity kills momentum.

You should always have a commission calendar aligned to rolling out the comp plans. Reps should have a letter in their hands second week in January at Sales Kickoff.

And they should sign it. Fast.

Otherwise you don’t actually have a contract.

Yes, you have a variable component in your employment agreement with the rep, but the comp plan you have is for that particular year. We can’t pay you on last year’s plan and we can’t pay you on this year’s plan that you haven’t signed yet.

CFOs have reminded me of this multiple times, bemoaning the times that they chased a rep into the summer for their John Hancock.

And then what inevitably happens is they come back and say the amount you paid them in Q1 isn’t right. Or worse, a rep leaves without signing their comp plan and makes allegations that you didn’t pay them correctly. And the only thing you can do is go back to the prior year’s comp plan (which isn’t right either).

Use cash payout as a forcing function to get people to sign!

Oh, on the topic of cash…

Paying sales people is one of your top three cash outlays after normal payroll and infrastructure costs. You don’t want to “grow your way into the ground” because you are aggressively compensating reps on deals that the company hasn’t been paid on.

This means your payment terms at the customer level need to align with the payment terms for reps. They don’t need to be exact, but they should be in the same ballpark. For example, you don’t want to have net 90 payment terms for the customer but you pay reps commission on a monthly basis as soon as the booking is inked. That’s negative float.

This also brings up the concept of claw backs. What happens when a customer doesn’t pay but you’ve made the rep whole? We’d all like to think our collection rates are 100%, but every once in a while Venezuela defaults on it’s debts. Woops.

You don’t have to worry about this at all if the reps only get paid once the company gets paid. Disaster averted.

But you do have to worry about it the longer the customer payment terms drift from making the rep whole.

The best way to deal with this is to take it out of their next check. From the rep’s perspective, giving money back is way worse than not seeing net new money.

If they leave, that’s between you, them, God, and a Delaware court.

Interestingly enough - an issue I’m seeing pop up with new AI companies - they pay reps on “ARR” that’s really a series of three month pilot deals. The rep sells something for $3K and we call it $12K in ARR. And the comp plan is paid on ARR. So the rep get’s paid like it’s a $12K deal, upfront, and then it goes POOF.

If you’re going to play it fast and loose with ARR (which you shouldn’t: see here) don’t ALSO play it fast and loose with comp. That’s a disaster waiting to happen.

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