Latest / Sales Leadership with Fexingo: Quota Carriers, Sales Managers, and Revenue Teams / The Hidden Math Behind Sales Compensation Plans
Transcript
- Lucas: Luna, I want to start with a number that stopped me cold. A survey of sales reps across three hundred B2B companies found that only 43 percent of them actually understand how their compensation plan works. Luna: Wait — more than half of salespeople don't understand how they get paid? That's insane. Lucas: It gets worse. The same survey showed that 28 percent of reps actively distrust their comp plan. They think it's rigged against them or designed to cap their earnings. Luna: Right. So you've got a sales force that doesn't understand the rules and doesn't trust the system. That's a recipe for low morale and missed quota. Lucas: Exactly. And yet most sales leaders spend more time tweaking the CRM pipeline than they do designing the comp plan. It's the single biggest lever they have to influence behavior, and it's often an afterthought. Luna: So what's the alternative? What does a well-designed comp plan look like? Lucas: Let me give you a concrete example. There's a mid-market enterprise software company — about 500 reps, average deal size around 80,000 dollars. Their old plan was simple: 5 percent commission on everything, straight line, no cap. Sounds fair, right? Luna: Sounds clean. No games. Lucas: But the problem was that their top performers — the ones in the top 20 percent — were coasting. They'd hit their number by month nine and then park deals into the next quarter because there was no incentive to accelerate. Meanwhile, the middle 60 percent felt like they were on a treadmill. No clear path to a bigger payout. Luna: So they switched it up? Lucas: They moved to a tiered acceleration structure. Below 80 percent of quota, the commission rate dropped to 2 percent — effectively a decelerator. Between 80 and 100 percent, it stayed at 5 percent. From 100 to 120 percent, it jumped to 7 percent. And above 120 percent, it went to 10 percent, uncapped. Luna: Interesting. So they punished underperformance and rewarded overperformance exponentially. Lucas: Right. The decelerator below 80 percent is key. It creates a floor that reps desperately want to avoid. But the accelerator above 100 percent — that's the rocket fuel. Within two quarters, their quota attainment went from 62 percent of reps hitting number to 83 percent. And the top 20 percent started pulling in deals they'd been sitting on. Luna: But doesn't that incentivize sandbagging? I mean, if you're at 95 percent in month eleven, you might hold a deal so you start the next quarter with momentum. Lucas: That's the classic objection. And it's valid — unless you pair the plan with a proper quota-setting process. This company used a rolling six-quarter weighted average of a rep's actuals to set next year's quota. So if you sandbag, you're essentially lowering your own future quota. The math punishes you. Luna: That's clever. The plan itself becomes self-correcting. Lucas: It also addresses what I think is the second-biggest mistake in comp design: the ratio of base to variable. Most companies default to a 50-50 split for enterprise sales. But that's a one-size-fits-all number that doesn't account for deal cycle or complexity. Luna: What's the right ratio? Lucas: Depends on the role. For a transactional sales rep closing deals under 10k in a week, a 70-30 split toward variable makes sense — you want them hungry and moving fast. But for a strategic enterprise rep with a nine-month cycle and a 500k deal size, you might go 60-40 base-heavy. They need stability to build relationships. Luna: So the base salary is essentially an investment in patience. Lucas: Exactly. And there's research to back it up. A study of over 1,200 sales organizations found that the optimal variable to base ratio for enterprise sales is actually 35-65 — more base than variable. Companies that used a 50-50 split had 15 percent higher turnover among their top performers. Luna: Higher turnover? That's counterintuitive. You'd think a bigger commission opportunity would keep them. Lucas: The problem is volatility. If a rep has two bad quarters because of factors outside their control — product delays, market shift, whatever — and they're on a 50-50 plan, their total comp drops by 25 percent. That's a shock to their household income. So they leave for a competitor with a higher base. Luna: So a higher base actually protects retention. Lucas: Yes, but only if you also design the variable piece properly. One of the most elegant comp structures I've seen came from a cybersecurity company. They used a multiplier tied to customer retention. If your deals had a 90 percent renewal rate after 12 months, your commission multiplier was 1.2x. If it dropped below 70 percent, it fell to 0.8x. Luna: So they're paying for quality, not just volume. That makes sense for a subscription business where lifetime value is everything. Lucas: It also aligns sales with customer success. The two teams used to fight over who owned the renewal. Now the sales rep has a direct financial incentive to sell to the right customer — not just anyone with a credit card. Luna: But let me push back. Doesn't all this complexity create the very problem you started with — reps not understanding the plan? Lucas: That's the tension. The ideal plan is simple enough to explain in five minutes but sophisticated enough to reward the behaviors you want. The cybersecurity company I mentioned had a one-page summary that every rep got in their onboarding packet. Three bullet points: your base, your commission rate, and your retention multiplier. Luna: So the complexity is on the back end, but the front end is dead simple. Lucas: Right. And they ran quarterly plan reviews where the finance team walked through actual payout scenarios. No one was left guessing. That transparency alone drove a 12-point increase in reps' trust scores on the annual engagement survey. Luna: Okay, so we've talked about accelerators, decelerators, base to variable ratios, and retention multipliers. What's the one thing every sales leader should do before designing next year's comp plan? Lucas: Ask three questions. First: what specific behaviors do we want to increase? Second: what behaviors are we accidentally rewarding right now? And third: how will we measure whether the plan is working within 90 days? Luna: The second question is the killer. Most companies don't realize they're rewarding sandbagging, or deal-splitting, or discounting. Lucas: Exactly. One company I worked with had a plan that paid full commission on any deal closed before the end of the quarter, regardless of the discount. Guess what happened? Reps started offering 30 percent discounts to close early. Revenue grew, but margins cratered. The comp plan was literally eating their profit. Luna: How did they fix it? Lucas: They introduced a discount drag — for every percentage point below list price, the commission rate dropped by half a point. Suddenly, discounts became expensive for the rep. Average discount went from 22 percent to 14 percent within a month. Luna: That's the power of a well-designed plan. You don't need a sales manager to police discounts — the math does it for you. Lucas: And that's the ultimate goal. The best comp plans run themselves. They align individual motivation with company strategy so tightly that the rep's self-interest and the company's interest are the same thing. Luna: So if I'm a sales leader listening right now, what's one concrete change I could make this week? Lucas: Pull last year's attainment data. If you have a straight-line plan — same commission rate from dollar one — map out what your reps would have earned with a tiered accelerator. I guarantee you'll see a different distribution. You'll probably find that your middle performers are leaving money on the table, and your top performers are under-incentivized. Luna: That's a powerful exercise. And it costs nothing to run the numbers. Lucas: Exactly. The math is already there. You just have to look at it the right way.