Your Compensation Plan's #1 Job (It's Not What You Think)
By Shawn Hamilton, M.S., DBA(c) Shawn Hamilton is a leading sales leadership advisor and doctoral researcher at the University of Houston, specializing in Sales Leadership.
Your Compensation Plan's #1 Job (It's Not What You Think)
Ask any sales leader the purpose of their compensation plan, and you'll get the same answers:
"To motivate the team."
"To drive the right behaviors."
"To reward top performers."
While all true, these answers miss the single most important function of a sales incentive plan. The #1 job of your compensation plan is communication.
Your plan is the most brutally honest document in your company. It is a memo from you to your team that communicates, in no uncertain terms, what you actually value.
Your company mission statement might say "We value long-term partnerships," but if your comp plan pays a 30% accelerator on new logos and a 0% commission on renewals, what you're really communicating is: "Go hunt, and don't worry about the customer after they sign."
Your team will ignore the plaque on the wall. They will follow the money.
The Comp Plan as a "Principal-Agent" Contract
This isn't just opinion; it's a foundational concept in economics known as "Principal-Agent Theory" (Jensen & Meckling, 1976).
The Principal (the company) wants to maximize long-term, profitable, sustainable growth.
The Agent (the salesperson) wants to maximize their own personal income.
These two goals are not always aligned. The agent might be tempted to give a massive discount to close a deal today (maximizing their commission) even if it destroys the company's long-term profitability (hurting the principal).
The compensation plan is the contract you create to align these two warring interests. It is the single most powerful tool you have to signal what "winning" really looks like.
A poorly designed plan doesn't just fail to motivate; it actively communicates the wrong priorities, creating a team that works against the company's strategic goals.
Actionable Takeaways: How to Audit Your Signals
Stop "rolling out" your comp plan. Start communicating it. Before you finalize your plan for next year, audit it for these common signal disconnects.
The "Teamwork vs. 'Super-Rep'" Disconnect. You say you want collaboration and team selling. Do you pay for it? If 100% of a rep's variable pay is tied to their individual quota, you have communicated that teamwork is irrelevant. A-players will hoard knowledge, not share it.
The "Profit vs. Revenue" Disconnect. You say you want profitable deals. Do you pay for it? If you pay on gross revenue, you have communicated that margin doesn't matter. You are incentivizing your reps to give away discounts to hit their number at month-end.
The "Complexity vs. Focus" Disconnect. You say you want the team focused on three key goals. But your plan has seven accelerators, two kickers, and a MBO component no one understands. You have communicated confusion. A complex plan is a signal of unfocused leadership.
Your team is listening. Your compensation plan is the loudest, clearest message you will send all year. Make sure it's telling the truth.
References
Jensen, M. C., & Meckling, W. H. (1976). The theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360.
