3 Ways To Optimize Your Incentive Compensation Program

By Mark Schopmeyer

Variable compensation is the largest sales expense for most businesses, averaging roughly 40% of total sales costs. It’s also incredibly complex and, without the right optimization strategy, can end up detracting from profits instead of efficiently driving more revenue.

For most companies, offering an effective incentive compensation program without spending more than necessary is a delicate balancing act. We all want to motivate our go-to-market teams to hit revenue goals, but don’t want to prioritize bonuses over the bottom line.

Designing a program that’s adaptable to changing market conditions is key. Compensation planning may be wrapped for 2024, but incentive programs can’t remain stagnant. Business objectives change throughout the year — especially in a volatile market — and successful incentive programs reflect that.

So how can you get your business to strike the right balance with your incentive compensation program? Start with these three steps:

Analyze the overall compensation cost of sales

Although variable compensation is often one of the biggest expense line-items, it also has the potential to yield the highest ROI. It all depends on whether or not you put the right incentives in place to motivate GTM behaviors that benefit the bottom line.

Analyzing the overall compensation cost of sales is the first step in making that happen.

To calculate your organization’s compensation cost of sales, add the costs of your commissionable-team’s base salaries with variable pay, and then divide that by revenue and bookings.

You can then compare your compensation cost of sales to industry benchmarks (e.g. the benchmark for B2B companies is 7.9 cents for every dollar of revenue or bookings generated, according to the Alexander Group).

This gives you the insight you need to evaluate both the cost and effectiveness of your incentives to see where you might be over- or under-investing, so you can reshape plans accordingly.

Look for ways to lower compensation program costs

Beyond the cost of commissions, organizations spend (and waste) a ton of time and money supporting incentive compensation programs.

A recent study found that more than half of sales managers spend two to three days each pay period resolving questions or disputes. Also, far too many organizations still use spreadsheets to manually calculate and track commissions (I know this firsthand from years of managing sales commissions in Excel).

There are a number of ways to streamline those costs by improving productivity and increasing the initial accuracy of payouts. Investing in AI, automation and reporting tools can help teams avoid inquiries, speed up manual tasks, and make it easier to surface plan and performance data. This saves time and reduces costly human errors that would otherwise allow spend to fall through the cracks.

Motivate behaviors that drive revenue results

Each business model is unique. Carefully examine your company’s goals and strategy and ask yourself: Does our incentive compensation strategy support this? You might be surprised.

Companies often fail to consider the entire lifecycle of the customer when designing incentive programs.

SaaS companies, for instance, should think about how to enable success beyond implementation and incentivize reps to not only make the initial sale, but also increase product adoption, showcase value and reduce churn.

One example could be offering variable compensation for customer success reps who are responsible for adoption post-implementation. Designing plans that incentivize activities for CSMs and others who directly impact customer adoption and engagement — including renewals, upsells and advocacy — helps motivate and push performance to the next level.

Or, if your company offers consumption-based pricing, align incentives to support that model. This means tying reps’ commission payouts directly to customer usage, which is directly associated with the value the customer is seeing. This incentivizes reps to play an active role in a customer’s adoption post-sale, helping drive product knowledge and usage, and encouraging longer-term retention.

Keeping a close eye on sales performance and understanding how your compensation strategy contributes is required to run a sustainable revenue engine. It’s also crucial to evaluate and modify your plans as market factors fluctuate, and course-correct when the incentives and actions of sales teams are not driving toward company goals.

If you clearly understand how your incentive compensation strategy is impacting performance and revenue, you have the power to quickly and consistently identify what’s working and what’s not, iterate and always improve.

Mark Schopmeyer is the co-CEO of CaptivateIQ, an incentive compensation management platform he founded after spending too many years managing and tracking sales commissions in spreadsheets. Through CaptivateIQ, he now helps hundreds of go-to-market teams optimize their compensation strategies.

Illustration: Dom Guzman