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8 Things to Review Before Accepting a Sales Commission Plan

what to examine in a sales commission plan

 

“It’s not like I didn’t understand the comp plan, but it somehow went from a one-page rewards-based plan to a 10-page online agreement that nobody wants to read.”

That’s how my friend Stacey describes the way sales compensation plans have changed over the last 15 years of her SaaS career. Why do sales compensation plans have to be so complex? Considering everything that goes on to make it a plan that everyone is happy with, it’s an inconvenience we’ll have to bear.

Sales compensation was set up to ensure that reps are suitably rewarded for their performance. It started with a simple approach:

  • Here’s your quota→ hit your numbers → get paid commissions at 8%. Post your quota attainment → get paid at 12% commissions.

Today, a comp plan as simple as this is as rare as red roses blooming in the desolate Sahara desert. Plans have evolved over time and are becoming quite a grueling code to decipher.

Complexity aside, a lot of reps have had at least one experience wherein their overall commissions didn’t match with all related criteria promised as part of the plan. And most of the time, the comp plans had certain conditions that allowed such an occurrence.

We need to collectively understand the intricate details of the document so that every sales rep and sales leader is aware of the important elements to identify. Before going any further, there are two things to keep in mind:

  • First, compensation plans are not created in isolation. All additional clauses in your plan were probably introduced because of a bad past incident by a rep. Don’t be hard on RevOps and finance folks for putting guardrails up.
  • Second, ask for the compensation plan in advance before accepting a new offer. The OTE is of very little use if your comp plan is messed up.

Refer to this document while you’re going over your comp plan whenever you are being offered a new job or whenever your comp plan is being updated in your current firm.

What should every rep and manager check-in their compensation plan?

Let’s go over the core things reps and managers need to check over for compensation plans.

1. Ramp policy

During the initial months as a rep, you won’t be able to hit your full quota. You’re usually given guaranteed draws so that you get paid the incentive. There are different criteria to be curious about.

  • Ramp time: This gives you a rough idea of how long you will be given before you are expected to carry the full targets. The industry ranges are around six to nine months for MM/Enterprise sales and three to five months for SMB sales businesses.
  • Draws: Some companies offer straight up 100% incentive payout during the first three months while others do a staggered payout like 80% on the first month, 60% on the second and 40% on the third. Usually, draws stop after the third month. Draws are a little more complex to explain in the context of this article as they dictate your cash flow. Here are five things to check in your draws plan before accepting a new sales job.
  • Ramp quota: As it might take almost four to nine months for a rep to ramp, they are given a lesser quota post their guaranteed period. Ramp quota should give a sense of how much you are expected to close in a quarter.

Quota-related details may not be shared before you are joining but you must be aware of draws and expected ramp times in your comp plan. If your company doesn’t offer draws or proposes an unusually shorter ramp time, that’s certainly a cause for concern.

Questions to ask:

  • Do I get my incentives during the initial ramp period?
  • What is their policy on draws? Do I get an advance on my commissions?

2. Revenue vs. non-revenue goals

Sales reps are compensated mainly for opportunity closures but it is not uncommon for them to be held responsible for opportunity generation along with the SDR. But it gets tricky when your incentive is paid out based on opportunity generation as well instead of just closures.

Non-revenue goals or components of your commission plans are not very lucrative as they don’t get the same commission rates as closures. They are also not something you can influence directly and might require help from the SDR and marketing teams.

Be cautious if a firm says you will be paid greater than 20% of your incentive through opportunity generation. Reps need to carry pipeline goals, but not as part of their compensation. They are a distraction to their primary goal of closing deals.

Questions to ask:

  • Is my incentive based on something else other than closing deals?

3. Bookings vs. invoices

As a rep, a comp plan based on bookings is much more beneficial to you than one based on invoices. The same goes for sales leaders as well.

In bookings, you get paid for closing the deal and you move on to the next deal. Implementation, invoicing and collections are left to supporting functions like customer success and operations team.

In invoices, you get paid only after the customer has paid the company, which means you’ll have to keep following up with the billing POC of the customer even though your actual POC has started using the product. It’s much more cumbersome and eventually derails you from actual selling.

Companies have a lot of reasons like a history of bad customers, bad sales, etc. to choose invoices over bookings, but as a rep, bookings keep things much simpler. However, bookings don’t always mean you can cash a check if the customer doesn’t pay the company. That’s when a guardrail called ‘clawback’ comes into play.

Questions to ask:

  • Am I getting paid on bookings or invoicing?
  • If it’s on invoicing, am I comfortable committing additional efforts to collect invoices as well?

4. Clawbacks

A clawback is a contractual provision that allows companies to get back the compensation already paid to employees if the customer pulls out of the deal or the invoice fails. Some companies even apply a penalty on top of clawback for the bad sale. Clawbacks are mostly automated and will hit your paycheck even if you are not aware of the situation. So it’s important for you to understand how they affect your payouts.

Questions to ask:

  • What is their clawback policy if a customer makes a U-turn and decides not to pay?
  • Sometimes, customers refuse to pay due to products unable to meet their feature requests or implementation failures or bad collections processes. Do they make exceptions to clawback if it is not the rep’s fault?

5. Cliffs, accelerators, and decelerators

Cliffs in compensation are similar to cliffs in your ESOPs or RSUs vesting schedule. You get zero until the cliff time, and in this case, it’s the cliff percentage. Only post a certain % of quota attainment, and you get paid your commission.

Accelerators are used to increase your commissions’ rate from 1x to 1.5x or 2x. They are used to motivate you to go beyond the targets. Companies add accelerators to your comp plans when they want to reward high-performing reps more.

Decelerators are used to decrease your commissions’ rate from 1x to 0.75x or 0.5x. This is used as an alternative to cliffs. Companies pay employees who do less than 50% at 0.5x commissions. Instead of being paid the decided percentage for 100%, you get paid half of it. For example, instead of being paid at the decided 8% rate, you will get paid commission at 4%.

As a rep, accelerators are super helpful and lucrative. Even if you have a bad quarter, a good quarter where you overachieve will make up for the bad one. So, always choose the plan with good accelerators. Don’t worry too much about decelerators or cliffs as they’re only applied when your performance is bad. Nevertheless, it is good to be aware which of these three your plan has in case you end up with an unlucky quarter.

Questions to ask:

  • Does the plan include an accelerator or decelerator that I should potentially look out for?
  • Do I have to do a minimum % attainment to be eligible for commissions?

6. Capped vs. uncapped commissions

This is pretty self-explanatory. If you have two options and are confident in your selling ability, always pick the company that offers uncapped commissions.

Questions to ask:

  • Are the commissions capped?

7. Annual quota and payout periods (for leaders only)

As a leader, you might be expected to carry annual targets with annual incentive payouts. Usually, companies will have either partial payouts every quarter measured against your annual performance or a draws plan that lets you take an advance on your commission.

Companies do reserve the accelerators to apply only on annual attainment while they just pay the prorate payouts every quarter. It’s a big red flag if you have to wait till the end of a year to get a taste of your commission.

Questions to ask:

  • Should I wait till the end of the year before I start getting my incentive payouts?

8. Overrides

This is one of the most important aspects of your compensation plan that you should pay attention to. A compensation plan can have an override policy which says that they can be exercised, if need be. Overrides are changes made manually to your final incentive payout that doesn’t reflect the actual performance.

It serves two purposes: one good and one bad. The bad one is that it can be used to cap your payout for a deal if the company feels they are paying you a lot for a deal. The good one is that it can also be used to increase your incentive payout during times of economic downturn where you’re barely doing your numbers.

The cons outweigh the pros. If there is an override clause on the compensation plan, then you are just signing a comp plan on good faith and nothing else. Tread very carefully and ask multiple questions to the HR team or the sales leaders as to when the overrides would potentially be exercised.

Questions to ask:

  • Does the plan give the company special privileges to override my payout?

Demystifying compensation

Compensation plans are not software agreements that you can just agree to, though they are made like one sometimes. This means it’s necessary for you to go through them in detail and review these important considerations before accepting them. Now you’re prepared to ask the right questions and make conscious choices regarding your pay.

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