3 signs your sales comp plan needs a redesign

Hi Everyone,

Your sales compensation plan tells reps which behavior gets rewarded.

They will do what the plan pays them to do, even when it works against the company.

A poorly designed plan can attract the wrong customers, reduce margins, encourage discounting, and push reps towards short-term revenue.

Today, we'll give you three questions to test whether your current plan needs to change.

Trap 1: Copying a plan from a different company

One common mistake is importing a compensation plan from a bigger or later-stage business.

The problem is that the inputs are different. Your average deal size, sales cycle, win rate, margins, and buyer are not the same as theirs.

A plan built for $500,000 enterprise deals won't work in a business closing $15,000 deals at high volume. Copy the wrong end of that spread, and your team either burns out chasing impossible numbers or hits its target without much effort.

Mark Roberge, who built HubSpot's sales team from zero to $100 million in revenue, used three different compensation plans during the company's first six years. Each one matched HubSpot's stage at the time.

Your plan should pass the same test. Was it built from your own deal size, win rate, and sales cycle, or inherited from somewhere else?

Trap 2: Letting the plan contradict the strategy

You can tell the sales team that retention matters. If you only pay them for new bookings, they will focus on new bookings.

When the strategy and the compensation plan disagree, the compensation plan usually wins.

HubSpot learned this the hard way. Its early plan paid reps $500 for every new customer, with a clawback if the customer left within four months.

Within a year, customers were leaving at a rate of 8% a month. For a subscription business, that was not sustainable.

HubSpot changed the plan, so reps earned more for customers who stayed and less for customers who left quickly. Within six months, the rate of customers leaving had fallen by 70%.

The original plan rewarded reps for closing customers. The new plan rewarded them for closing customers who were likely to stay.

That kind of mismatch can sit in any plan. If a rep maxed yours out and ignored everything else you said about strategy, would the company still win?

Trap 3: Over-engineering

At some point, reps stop trying to understand the whole structure and focus on whichever number gives them the clearest or fastest payout.

Stanford studied compensation at a Fortune 500 contact lens manufacturer over several years. When the company removed earnings caps and quotas, revenue rose by 9% the following year, equal to roughly $1 million a month.

Every additional rule in a comp plan can change behavior in ways you did not intend.

A useful starting point is no more than three main metrics for each role, one additional commission tier, and one short-term bonus running at any time.

There is also a quick test. Ask a recently hired rep to explain how they get paid. Can they do it in 30 seconds without opening a spreadsheet?

Try this today

Take your current compensation plan and run it through these three questions:

Was it designed for your business and your current stage?
Does it reward the behavior your strategy depends on?
Can a rep explain it clearly in 30 seconds?

If two of the three answers concern you, schedule a redesign before your next planning cycle. Don't wait until the team has spent another six months following incentives that no longer serve the company.

Go deeper

👉 Mark Roberge in HBR: The Right Way to Use Compensation — Roberge's framework for matching comp to strategy at each growth stage.

👉 Bridge Group: 2024 SaaS AE Metrics & Compensation Report — benchmarks on base-vs-commission split, quota, and target earnings.

👉Stanford: Eliminating Sales Quotas May Stimulate Profits — a summary of the Misra and Nair contact-lens-manufacturer study.

👉 Ian Larkin in the Journal of Labor Economics: The Cost of High-Powered Incentives — the paper on how tiered commissions drive deal-timing games.

Coming up tomorrow

Tomorrow we'll walk you through a quarterly review for every AI tool your company pays for, with five checks to decide what to keep, watch, and cut.

Thanks for reading!

P.S. Know a head of sales who should run these three questions against their current plan? Forward this their way.