Why Sales Compensation Plans Fail
Most business owners assume that throwing more bonus money at salespeople will fix underperformance. It doesn’t. A sales compensation plan only works if it aligns with outcomes that matter to the business, profitable, predictable growth. If your plan doesn’t drive the right behavior, it’s not a plan. It’s a liability.
The Core Principles of Strong Sales Compensation Plans
A strong plan is simple, fair, and transparent. Salespeople should be able to explain it in two minutes. Compensation should reward results, such as revenue, profit, retention, and expansion, not just activities. Activities belong on the scorecard. The plan should also protect margin, scale with performance through accelerators, and punish excessive discounting with decelerators or margin multipliers. Clawbacks are essential, and each role needs its own unique plan. Hunters, farmers, and SDRs play very different games, so their pay structures must reflect that.
Building Plans for New Business AEs
Hunters need compensation plans that push for growth. For example, a new business AE with a $120,000 OTE split 60/40 between base and commission and a $1.2 million annual quota would earn roughly four percent commission at target. Accelerators would then reward performance above quota, such as six percent up to 110 percent of target, eight percent up to 130 percent, and ten percent beyond that. If gross margins matter, and they should, you can pay directly on gross profit or apply margin multipliers. That way, reps are rewarded for protecting value, not giving discounts.
Designing SDR and BDR Compensation Plans
If you pay SDRs by the meeting, you’ll get meetings, most of which go nowhere. The better approach is paying for sales-qualified appointments accepted by an AE and that advance in the pipeline. Adding a small bonus if the deal eventually closes makes SDRs invested in pipeline quality. This keeps them focused on deals that actually drive revenue instead of chasing activity that looks good but doesn’t convert.
Account Managers and Retention-Focused Roles
Account managers and customer success roles should be paid to retain and grow revenue. Compensation works best when it’s split between gross revenue retention and net revenue retention, with margin multipliers for expansion. That way, account managers are equally motivated to protect the base business and grow it profitably.
Ramping, Draws, and Seasonality
New hires need a ramp. A recoverable draw during the first three months gives them a safety net while still holding them accountable. For seasonal businesses, semiannual true-ups make sure salespeople aren’t penalized for slow months they can’t control. These tools create balance between fairness and urgency.
Quota Setting That Motivates Instead of Crushing
Quotas that are too high lead to sandbagging and burnout. The best quotas are ambitious but achievable for 70 to 75 percent of the team. They reflect territory potential, pipeline history, and marketing support. Overly aggressive quotas don’t inspire; they destroy trust.
Rules That Protect the Business
Strong compensation plans protect both the salesperson and the business. That means no caps if someone over-performs, they should be paid fairly. It also means clawbacks on deals that churn, return, or remain unpaid. And it means clearly documented crediting rules so multiple reps know exactly how they’ll be paid on shared deals.
Using SPIFFs the Right Way
SPIFFs are short-term tools, not long-term strategies. They should be used for things like launching a new product, accelerating stalled pipeline, or driving adoption of a specific initiative. But they must be time-boxed, margin-aware, and clearly defined. Done right, they create short bursts of focus without disrupting the core plan.
The Most Common Mistakes I See
The same mistakes come up again and again: paying the same rate on renewals and new logos, paying commissions before cash collection, ignoring margin, rewarding activity over results, and writing compensation plans so long and complex that no one can understand them. The strongest plans are two pages, written in plain English, and tied directly to business outcomes.
Governance and Ongoing Management
Once your sales compensation plan is in place, it needs discipline. A signed two-page document with examples ensures clarity. Quarterly reviews compare cost of sales against gross profit. One person owns the plan and typically the sales leader, with finance validating the math. Retroactive changes are off-limits. Any ambiguity must be clarified moving forward.
Examples of Effective Plans
Here’s what this looks like in practice. A new business AE with a $120k OTE and a $1.2M quota earns commission tied to revenue adjusted by margin multipliers, with accelerators for overperformance and clawbacks for unpaid deals. Meanwhile, an account manager with a $100k OTE splits variable pay evenly between retention and expansion, with expansion commissions only paid on gross profit. Both structures motivate the right behavior while protecting the company’s bottom line.
The Role of Fractional Sales Management
Most SMBs struggle to design compensation plans that work. They either overpay and hurt margins, or underpay and lose talent. As a fractional sales leader, I analyze historical performance, model payout curves, and design plans that align with business goals. I also help implement them in the CRM, ensure payouts are transparent, and coach managers to reinforce the plan. This keeps the system honest and eliminates months of trial and error.
Why Now Is the Right Time
If your compensation plans aren’t driving the right results, don’t wait another year. The longer you hold onto a bad plan, the more damage it does to morale and profitability. A strong sales compensation plan motivates your team, drives predictable growth, and protects your margin. Done right, it becomes one of the most powerful levers you have for scaling your business.
FAQs
What should a sales compensation plan include?
A strong plan includes base salary, variable pay tied to clear outcomes, accelerators for over-performance, margin protection, clawbacks, and transparent crediting rules.
Should salespeople be paid on revenue or gross profit?
Paying on gross profit is ideal because it protects margin. If you pay on revenue, use margin multipliers to discourage discounting.
How long should a compensation plans be?
Two pages at most. The plan should be simple, clear, and easy for a salesperson to explain in a few minutes.
How often should sales compensation plans be reviewed?
At least quarterly. Use these reviews to check cost of sales, margin health, and payout fairness. Adjust forward, never retroactively.
Why use Fractional Sales Management to design comp plans?
Because most SMBs don’t have the expertise or time to get it right. A fractional sales manager brings experience, models the numbers, implements systems, and ensures alignment with business goals.
Additional Resources on Sales Compensation and Sales Leadership
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Sales Metrics That Actually Drive Growth
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How to Evaluate and Improve Sales Team Performance as a CEO
A practical guide for CEOs to spot underperformance, build accountability, and take corrective action.
Transformative Sales Systems
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