Many technology and software organizations are shifting toward consumption- or usage-based pricing models. Widespread adoption of artificial intelligence (AI) and cloud technologies is driving this change due to highly variable compute costs. This shift raises an important question: How can companies successfully structure sales compensation plans under this model?
Ideally, fine-tuning a sales compensation plan consists of three key guidelines: embrace simplicity, uphold continuity and put key company priorities first. Companies that effectively incorporate these standards will create momentum for the year ahead.
Embrace Simplicity
It’s vital to create a compensation plan that’s simple enough for a sales rep to easily determine payouts, using straightforward, back-of-a-napkin calculations, rather than complex spreadsheets. A sound plan clearly and concisely presents what the team is being incentivized to do.
Effective plans are simple, with two primary measures and two secondary measures. Measures such as gates, conditional accelerators and sales performance incentive funds (SPIFFs) can quickly complicate a previously simple plan. SPIFFs are short-term incentives designed to drive focus on specific areas. These detailed incentives can dilute the impact of a commission-based approach when used excessively.
Another measure of simplicity is determining which functions within the go-to-market organization should be incentivized through commission plans. Preferably, incentives apply only to field sales or customer-facing team members.
It’s critical for companies to evaluate the incentive plan for each overlay team and base this determination on an objective view of the specific activity for which an overlay team is responsible. For example, can the commission plan’s metrics be tied to that particular activity, and can they be reliably measured and forecasted? If not, it is better to keep the corresponding overlay team on a corporate bonus plan.
Uphold Continuity
Continuity can take many forms. One involves maintaining a consistent commission plan structure for at least two years. The sales team’s confidence as it enters the second year of the cycle can increase significantly because it knows what to expect. The team also understands what steps it needs to take to meet its numbers, thanks to the commission structure’s stability.
There may also be cases where the goals of the overall sales compensation plan take two years to play out. In this situation, adopting a two-year compensation plan helps foster the same level of stability.
A sales team’s behavior has a deep impact on customer relationships over the long term. This includes conversations initiated, use cases shared, and the business outcomes the team is working to influence. Another benefit of longer, more stable commission cycles is that they free the sales team from having to study how to make money under a new arrangement. Instead, the team can focus on learning how to make further inroads with clients and increase alignment with customer needs. A company can reap this advantage when individuals can easily link efforts, goals, rewards, and feedback.
Prioritize Organizational Objectives
For individual team members, balancing multiple priorities is associated with higher levels of internal stress and conflict. Including all corporate priorities in a compensation plan can weaken each one, as salespeople struggle to focus on optimal rewards. The high degree to which the compensation plan guides the sales team’s actions is well understood. It’s critical to focus internal discussions on the specific priority-related must-have metrics to incorporate into the plan. Decades of research demonstrate that organizations with clearly defined priorities consistently outperform those with unclear or competing objectives. Key considerations could include which parameters are needed in the sales compensation plan to align with the company’s priorities and which trade-offs should be considered when designing the plan.
For example, a company may find itself receiving a steady flow of new customers. After digging into the data, the underlying trend may show that many of these clients are agreeing to smaller dollar commitments. The organization can counter this by incentivizing the sales team to bring in clients with higher upfront spend, accepting the accompanying trade-off of a lower overall client volume.
Impactful Compensation Plans
It’s important that businesses do not abandon regular internal cycles when making changes to the sales compensation plan. Instead, use the normal planning cycle as an opportunity to conduct a structured audit and identify opportunities to streamline the plan.
This is a valuable time to kick the tires on the existing plan by asking the following questions: What is the company really paying for? What were the distribution curves of attainment? How many team members exceeded 100% of their quota? How many achieved at least 70%? How much did the plan pay out per dollar of revenue or bookings?
When a compensation plan is not working well, there can be immediate pressure from multiple sources to make rapid changes. At these moments, it is best to return to the fundamentals of effective change management. After diagnosing an issue, it may be tempting to initiate change immediately. The objective, however, isn’t simply change for change’s sake. Rather, the goal is to implement the right change at the right time to achieve the desired outcome.
Even when a compensation plan is not performing as expected, organizations should avoid revising it mid-year. Doing so can erode trust with the sales team. Instead of changing the goalposts mid-cycle, companies benefit from using the regular planning cycle to reset for the upcoming year. When addressing an underperforming plan, a deliberate, measured and well-timed approach is more likely to produce the desired long-term outcome.
When implemented effectively, sales compensation plans do more than reward performance; they shape behavior to align with the company’s overarching strategy and objectives. This is especially important as organizations increasingly adopt consumption- and usage-based models. By maintaining simplicity, reinforcing continuity and prioritizing the right objectives, companies can ensure their sales compensation plans align with short-term goals and long-term success.
