Even the most well-designed compensation plans often yield unwanted behavior and consequences. These unintended consequences are likely not a result of the structure of your compensation plan, but rather a lack of programmatic tracking and management. The good news? With knowledge and insight, you can proactively prevent these from ever occurring. Below are the five most common unintended consequences happening in companies today.
1. Additional Administrative Overhead
Did you know that the tracking structure of your compensation plan may be adding hours of extra administrative work for you and your team each week? That’s right, hours.
Consider the following scenario: One of your partners submits a deal registration but attached the wrong CAM from your team in Salesforce. The CAM who closed the deal is frustrated because his compensation relies on receiving credit in Salesforce. Because this CAM doesn’t have admin capabilities in Salesforce, he can’t fix the issue and has to spend time finding an account executive who can correct it. This error happens time and time again. Because of this, your CAM now spends several hours each week checking reports and calculations to make sure they are receiving credit and then pulling others away from their jobs to fix the issue.
Does this sound familiar? If your plan relies on your partners or other account executives accurately attaching CAMs to their deals and activities and you don’t give your CAMs the ability to edit these reports, then your team is inevitably spending hours each week on admin work when they should be chasing and bringing in new business.
2. Gaming the System
It’s not uncommon for people to ask, “How can I make the most money doing the least amount of work?” In fact, a quick Google search of this question generates over 2 billion results. A common answer: game the system.
Take a look at this familiar case: You’re a CAM focused on partner growth, and last year one of your partners had an explosive year. You know they’re likely to plateau, so you go out and find a partner who grew minimally the previous year. With this partner, your overall growth goal is significantly lower, and you’re able to quickly and easily surpass your goal for the year, earning full compensation while exerting minimal effort.
This is a simple example but one that is prevalent and hindering growth across the industry. As you continue to evaluate and/or design the structure of your compensation plan, be on the lookout for loopholes or unusual trends in your CAMs activity data.
3. Deal Stuffing
As we discussed in the first part of this series, companies often use compensation plans to accelerate and decelerate the selling of a product. For example, a plan may state that a CAM must sell x number of this one product in order to receive full compensation for the quarter. This sounds motivating but what often happens is that CAMs will add or ‘stuff’ those products into their current deals, creatively discounting all the products in the bundle to achieve their quota.
To break this down further, let’s say you order a $5 meal that comes with a hamburger, French fries, and a drink. The employee who earns a bonus for selling apple pie throws one into your order at no charge. Because there is no price difference, you accept the apple pie, and the employee gets a bonus for selling you that apple pie. No one loses. Right? Wrong.
When the employee gave you the apple pie for free, the overall price of every item in your order decreased. Effectively, this gave away margin that the company otherwise would have made. This also lowered the street price of all the items, impacting all initial and long-term profits. Along with this, when it comes time to buy lunch again (renewal), you will likely pass on the full-price apple pie and will order your original order.
This behavior is known as deal stuffing and negatively impacts long-term sales and revenue. When designing compensation plans, proactively implement rules to track and prevent this behavior.
4. Delaying Actions
If there is a time or accuracy component of your compensation plan, then a CAM may choose to delay actions such as deal registration and business planning to hit their metrics. Although this is often advantageous for CAMs, it can hurt your company’s quarter-to-quarter sales reports and revenue.
Consider the following: A compensation plan is structured so that a CAM is compensated for deal registrations this quarter and then compensated for business planning next quarter. Will this CAM, who should be doing business planning every quarter, choose to do business planning this quarter and next quarter? No, this CAM will likely hold off on all business planning until next quarter.
The same happens with deal registrations. If a CAM receives 1% for every deal registration this quarter but next quarter knows they’ll receive 1.5%, then a CAM will sit on purchase orders until next quarter when they’ll make an increased profit.
When designing your compensation plan, think about your quarter-to-quarter and year-long priorities, and make sure the activities, goals, and quotas align. If business planning is a year-long priority, then ensure your compensation plan is aligned to emphasize this for your team.
5. Term Compression
Finally, your team and partners can be compensated based on Annual Contract Value (ACV) or Total Contract Value (TCV). If your compensation structure rewards CAMs based on ACV, then these CAMs will only receive credit/quota from the first year of the contract and will not be concerned with the length of a contract.
A recent example: A CAM (whose plan is based on ACV) takes a 36 month, $90K deal and shrinks it down to a 24 month, $60K. This brings the cost way down for the client, and the CAM closes the deal. This action is known as term compression, a form of discounting, and is beneficial for the CAM and the client but produces negative long-term costs and effects for your company. Two consequences of term compression are:
- Term compression yields more overhead, or Sales, General, and Administrative Expenses (SG&A) to the cost of the sale over time. If a five-year contract becomes a 3-year contract, this means that you will have to renew this deal almost two times as often, almost doubling your work.
- If you are not careful, term compression will create conflict between your internal teams and your partners. As we mentioned in the first part of this series, ensure your teams (internal and external) align. If you comp your internal team based on ACV and your partner based on TCV, your partners will become frustrated.
Conclusion
As you build and implement your compensation plans with your internal teams and partners, keep your eyes out for these five unintended consequences, happening in companies throughout the industry. And remember, proper preparation and programmatic tracking and management can help your company avoid these consequences now and in the future.
Did you miss part one and two of this series? Read Part 1: ‘The 4 Compensation Trends Driving Revenue’ and Part 2: ‘Five Best Practices for Compensation Structure’.