<aside> 🧑‍🚒 Audience - This guide is primarily intended for early-stage startups that are launching their first incentive-based compensation programs or refining them for scale.

It applies to both Go to Market (ex. Sales, CS) leaders and G&A Leaders (ex. People, Finance).

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What exactly is incentive-based compensation?

Companies should strive to ensure that their employees feel that they are properly rewarded for their contributions. Incentive-based compensation is how an organization programmatically rewards employees based on their efforts (or team or organizational outcomes). However, how organizations strike the ‘right’ balance is difficult. You want to drive the right behaviors for employees based on their roles.

<aside> ☝ There are different types of incentive-based compensation beyond what I cover here. This guide focuses largely on cash-based programs in the form of commissions and bonuses.

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First: Differences between Commission Plans and Bonus Plans

There are two primary distinctions we want to make off the bat: commission plans and bonus plans. The table below breaks down some of the key differences.

Commission Plan Bonus Plan
Typical Structure An employee sells a ‘deal’ and receives a defined amount for that deal. An employee / department / organization achieves certain metrics based on an aggregated measure.
Level of Control of Outcomes More individual control Less individual control
Measured by a single metric or multiple metrics Less likely to be combined with other factors (ie. typically derived from a discrete thing and not influenced by other factors). More likely to be combined with other factors (ex. 50% individual performance and 50% department performance)
Compensation Mix More compensation likely to be incentive based Less compensation likely to be incentive based
Example A salesperson closes a deal of $100,000. They have a commissionable percentage of 5%. They then receive a commission of $5,000. A customer success employee maintains a customer satisfaction rating of 95% for the quarter. Based on a sliding scale, they are paid out a bonus of 10% of their base salary.
Payment Cadence Measurement is ‘per action’ (ex. deal closed) but may be aggregated for administration. Typically paid monthly. Measurement is based on a defined period. For company-level plans, typically annually or semi annually (potentially quarterly. For department-level plans, typically quarterly or monthly.

Formalizing a Plan

Let’s start with some Principles

I always think it’s good to ground yourself in principles. When you’re working through changes, it’s a great way to make sure you’re focused on the right things.

Here are a few that I recommend internalizing as you build out your plans:

  1. Avoid complexity and reduce ambiguity: the more difficult that your plan is to administer or decipher, the more frustration it will cause for stakeholders. Intricacy doesn’t scale.
  2. No one will ever be 100% happy: your plan is going to have some sticking points no matter what you do. Accept it.
  3. Automation everywhere: if you intend to scale, you need systems that are low friction and high visibility. Otherwise, checks wont get out the door.
  4. Predictability and Accuracy: design systems that enable employees to reasonably anticipate when they will receive their payments and that they can have full trust in.
  5. Changes should be forward looking: do your best to make changes that are effective in the future versus applicable to the past.
  6. Don’t Overcorrect: invariably, adverse things will happen. Don’t box yourself in by being reactive to small things.
  7. Holes will Happen: salespeople may surface quirks in the design of the plan. Be principled in how you address gaps not addressed by your plan.

Now, let’s talk Stakeholders