How Sales Compensation Affects Performance & Retention

By Scott Gordon, The Chief Revenue Officer

If you’ve been in sales for any length of time, you’ve likely encountered one of these five nasties:

1. Annual compensation plan adjustments
2. Commission ‘claw backs’
3. Miscalculated commission checks/Late commissions/Unpaid commissions
4. Deleterious quota adjustments
5. Commission caps/ceilings

While this is far from a complete list of the compensation issues sales professionals routinely face, it’ll serve as the basis of today’s blog. So, let’s take them in order.

Every salesperson I’ve been acquainted with dreads the annual comp plan changes that crop up inevitably toward the close of each fiscal year. While it’s understandable that business conditions change and sales and marketing costs must be adjusted to accommodate, I know of few other professions where pay structure is adjusted so frequently.

The expectation of any pay structure change in the minds of your salesforce creates uncertainty and can dramatically affect performance. For example, if a salesperson believes next year’s comp plan will be less lucrative to them personally, they will race to bring in as much business as possible while the current plan is in force. Alternatively, if they feel next year’s plan may be better, they will ‘sandbag’ (put off orders) for the purpose of “front loading” next year. This is especially true if they’ve already hit their quota.

The first scenario creates a temporary boom in business followed by a bust, while the other weakens fourth quarter performance in the near term while artificially inflating the subsequent first quarter. Both scenarios throw all your forecasting models out the window and if you have investors, you may have some explaining to do.

“Claw backs” on the other hand are a different animal entirely. Rather than cast the future in doubt like annual adjustments, claw backs cast a punitive light on the past.

Claw backs may be justified for many reasons including:

• Misquoted/mispriced products or services
• Customer cancellations requiring repayment of advanced commissions
• Customer short payments
• Retroactive discounts
• Salespeople “throwing in” products or services for “free”

Again, hardly an exhaustive list, but you get the idea. While claw backs are often necessary, whether right or wrong, they demoralize salespeople in deep and profound ways. Claw backs are often seen by sales as an unfair and undeserved punishment, and if the claw back was due to a customer cancellation that the salesperson feels your back-office personnel caused, they’re as good as working at your competitor as soon as practical and filing a complaint with your local Labor Board (which you’re now going to have to deal with both in terms of time and money).

Next, we’ll tackle the category of payments: specifically miscalculated, late, and unpaid commissions. I’ll put this as plain as I possibly can. Salespeople are coin operated. In other words, as long as you are popping coins into them, they will continue to operate, else or, they’ll stop. Whenever a company messes with a salesman’s money (and the reason for doing is moot), it has an immediate and negative impact on his morale and faith in the company in question. Inevitably, they stop selling. Yeah, they may continue to go through the motions (especially if there’s a salary involved), but that’s all they are doing.

Unpaid or late “check’s in the mail” excuses are obviously the most egregious offenses in sales’ mind, but miscalculated commissions will shake their faith equally. They will begin to question the company’s motives and the intelligence of the accounting/payroll team. You want neither.

I worked for a company that had allowed salespeople to ‘pad’ deals above par. Whatever they added, they got to keep half. This arrangement went on for years without incident, and the sales team absolutely loved it. One day, without warning, the executive chairman of the company decided to change that longtime and popular policy and make it retroactive!

What do you think happened? Since there was no convincing him otherwise, salespeople lost out on a lot of money they were counting on, and half the sales team quit. I lost many multi-million dollar reps in one fell swoop. That was a very, very tough hole to fill, and the sales organization was never again the same. Those that remained continued to sell, but did so with one eye open.

Quota adjustments are often justified by boards who feel that salespeople earn too much. Of course, without sales, there would be no board, but that’s for another blog.

I’ve never seen a quota adjustment in the down direction. They are most always up. Salespeople will usually suck it up the first time it happens, but over time, their ability to make money is significantly diminished and so is their motivation. These often-talented sales professionals will inevitably jump ship and entice colleagues to go with them. Think carefully before implementing wholesale quota adjustments as they’ll often cost you a lot more in the long run as your long-time talent rushes for the exits and into your competitors’ waiting arms.

Lastly, I will cover earnings caps and commission ceilings. In short, if you have these in place you’ll have a harder time attracting top talent (who don’t like earnings limits and will work for competitors who offer uncapped comp) and you’ll ultimately screw a cap on your own growth. Let your salespeople go for the gusto. Why would anyone want to put a cap on what salespeople can sell?  That’s just crazy talk!

Every single time I’ve interviewed for a sales job and there’s an earnings cap, I’ve declined that job. I’m not alone.

In conclusion, salespeople are money motivated professionals. The less you mess with their coin, the higher their morale, and by extension their performance. Consider carefully before rolling out any of the changes covered in this blog or any that might be perceived in a negative light. If you must make changes, you are best served by enrolling the sales team in the process.
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So, how do you do that? Stay tuned…