Why Are Sales Commission Plans a Bad Idea? When Are They a Good Idea?

By Michael Tessler, Managing Partner

Let me start off by saying that sales commissions plans have their place in larger more established organizations that are striving to build a repeatable and predictable sales machine. Many smaller companies try to adopt a similar approach and from my experience I have found most of these plans are very complicated and not aligned with the goals of the company. At True North, we work with a wide range of companies from small to very large, so we have an interesting perspective.

Why are startups different? Well, the simple answer is that the product fit has yet to be established in any repeatable manner. The question you want to ask is what is the goal of the sales team in an early stage business. The goal is to engage lots of prospects and determine the value of the solution and get people to adopt. Your goal is to get customers that will give you lots of feedback and act as references. You need these references to scale the business.

This also means that the best early stage sales people are focused on building value in the company and are inspired by the vision, the team and the long term equity. Many don’t even understand or care about the short term objectives because they want to build a great company and develop close and productive customer relationships.

So if you need to build a compensation sales plan as an early stage CEO, please make it as simple as possible. Don’t worry about margin at this point, you want everyone pushing in the same direction. If you have some level of double compensation, live with it. Don’t let people convince you that you should have a compensation plan with lots of complexity like quarterly bonuses, different rates for different products, etc. My simple rule. Every dollar of revenue is a dollar counted to compensation. You have plenty of time as you grow the company and teams to modify the rules. 

Dino shares, “Mike, speaking of keeping it simple. During the early Acme Packet days we had one number for the global sales team. The goal for the team that included the heads of APAC, EMEA and NA was $1M. As Mike mentioned we kept it very simple. We would all make our variable comp if we made our team objective. The next year we had a goal for each region. The message is simplicity in the early days. Grow the complexity of the sales plans as your business continues to grow and be successful.” 

Also, don’t worry that a salesperson will blow out their compensation plan and make a lot of money. That is a great story that will attract great sales people to your company. According to Dino, “In fact this is what you want to see. Marquis accounts in the early days that see sales teams blow it out will be the stories that are told 10 years later and help build your unique culture.”

At True North, we are often asked to review the compensation plans and they are normally too complicated for the stage of the business. Poor sales performance is rarely a function of the commission plan. It is often poor performing sales people or a bad product market fit. If you are struggling to grow your revenues, look at those factors first and don’t complicate the plan. 

As an early stage company, focus on growing revenue and logos and not focusing on compensation plans that could potentially detract or even alter desired performance. It would be great to hear about your experiences with sales plans - good and bad.