compensation vs good management

Compensation Management Mistakes

by Jun 25, 2021Compensation, Culture, Leadership, Talent

Your comp plan can’t do it all.

There’s a common trap that a lot of CEOs fall into when it comes to designing their compensation plans. The mistake so many leaders make is that they try to create a commission or bonus plan that does their managing for them. In other words, they try to substitute compensation for management. Over time I have come to realize that there is no perfect compensation program and ultimately one must do management. Let me explain what I mean.

Incentivizing Behavior

It’s tempting, especially in a sales-driven organization, to design a compensation plan that drives the kinds of behaviors you’re looking for. You want to align the incentives of your salespeople with the growth of the business, the opening of new geographies, the designing of new logos, and the selling of more items in the new product line. In other words, the more new business they bring in, the more money they can earn, so this should all work. A simple win-win scenario.

But that’s typically where things go off the rails. And the reason is that complexity leaks into the works.

The Downside of Complexity

I’ve written before that when people don’t understand what drives their bonus or how much they can earn, it fails to motivate them. When the compensation is too complex and sophisticated, then you lose the opportunity to leverage it in helping you manage.

For example, let’s say you want to design a sales commission plan based on sales of a new product. But then you add in a multiplier or kicker for selling that new product into a new vertical market. And then you add another kicker for selling it into newer geography. Perhaps a kicker for higher-margin sales would be good too. Before long, as you keep adding these modifiers, no one other than your accountant can calculate how much commission a salesperson earns from any sale.

The general rule is that you want to aim for having a commission plan that a salesperson can calculate in their head on the two-minute walk back to their car after closing a sale. If they can’t do that on their own, then your commission plan is too complicated.

I know from personal experience what it’s like to make this mistake. I remember designing a commission plan that had a basic rate for closing a sale. But then I layered in all these multipliers that would raise the rate of the commission if they hit those incentives. But the problem was that no one could understand what they earned when they closed a sale–which totally defeated the purpose of the plan in the first place.

Bonus Plans Made Simple

This same principle holds true for executive bonus plans as well. While you might be tempted to pepper your bonus plans with kickers based on elements like their 360-degree review results, the performance of their team, and the company’s profit levels, you’re only muddying the waters.

You’ve ended up making the plan so complex that they don’t know how to achieve it. Therefore, you haven’t changed any of the behaviors you were hoping to achieve.

The lesson, then, is to keep your incentive plans simple and easy to understand–and then do the job of managing the behaviors you want your people to emulate. While money can be a powerful incentive to get people to change their behavior, sometimes you can’t just delegate that job to your bonus program.

Back to Basics

When it comes time to design compensation, focus on making it clean and simple enough that a 12-year-old could calculate it in their head. If you want changes beyond that, then it’s time to put on your manager hat and get to work finding other ways to get the behaviors you want.