Designing Effective Compensation Plans: Balancing Company Needs and Employee Incentives (Full Transcript)

Speaker 1: Yeah, when we're talking about comp plans how they should be designed they should be designed to meet two needs one The company's need it should you should be able to have a comp plan that you can You can have no problem paying each Pay period and making sure that aligns with the cash flow So an example might be if your company and your sales Organization has a comp plan that pays a huge commission amount up front, but you're low on cash Right. Then does it make sense for you to say, Hey, we just got a hundred thousand ARR contract and we're going to pay this, um, you know, commissions 20% to, uh, these salespeople first year, but we don't have 20,000 in the bank right now to pay them. Why would we do that? It should actually like mirror, like the accounting standards of the cash flow of the company and then trickle down to the employee. Meaning like, if we're talking about selling a big hundred thousand dollar annual contract, okay. Okay, what's better, an annual contract because we need that stickiness or do you want a month-to-month contract because you need to get more money now? When are the payments coming in? How long does it take for that cash to clear? Do the type of clients you work with, right, if you're supporting companies that are like very well and like they're just they're doing well, they don't have cash issues with paying you on time versus like, hey, I'm working with companies that are struggling a little bit and I'm providing an alternative loan. Well, they might take a little bit longer to pay you back. So where are you going to get the cash to pay these people from? So that's kind of like the first thing from a business perspective. Consistency is what you definitely want in a comp plan. The second thing that you want in a comp plan is it should make sense. When I perform and do X, I get Y. That's more like of a metrics-based objectives comp plan, right? Where I do something and I get the money back, right, for doing it. Hey, sales rep, you need to make 100 phone calls. I make 100 phone calls, I follow the script, I get paid for the 100 phone calls. Now, if you want somebody to own the result, I think they should get paid more, right? Because the more risk you take away from me for doing something that may or may not work, you're paying me to think not to do. So if you're paying me to think I should make more, but there should be inherently more risk associated with that because of my skill level, right? If I'm a salesperson and I'm a junior, I've never done this before. Situational leadership says I got to do what you tell me to do, but if it's never been done before, you need somebody to like, you know, figure out how to sell this product that's never been sold on the market, then you're asking that person to take on a big risk. If they do want to take on the big risk and say they want to go commission only great, pay them a great percentage for that. However, if you're like, I have a hunch, I think these people are going to want this product. And I think if we attack it this way, where we, you know, directly reach out to them on LinkedIn or we talk to their portfolio companies or we partner with other vendors, whatever that situation is, you're paying that person to experiment. So there's no guarantee that what you told them to do is going to work, right? So then you should pay that person more base and you should probably pay that person for doing the activities exactly as you asked it so you can get the data reassessed and then at that point you may want to change your comp plan. So in the end of day comp plans, they drive behaviors. they should really just match the way the business makes money.