📖 Business
Sales Compensation Design
Cespedes treats sales compensation as a strategic lever that must align with the company's go-to-market strategy, not a standalone HR exercise. The core argument is that compensation plans drive behavior, and behavior that is not aligned with strategy produces activity without results. Most comp plans fail not because they are too generous or too stingy but because they incentivize the wrong things — rewarding new bookings when retention matters most, rewarding individual performance when team selling is required, or rewarding revenue when margin is the strategic priority. Effective comp design starts with the question "what behaviors do we need?" and works backward to the incentive structure that produces them.
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How It Works
- Pay Mix (Base vs. Variable) — The ratio of base salary to variable compensation signals the type of selling expected. High variable (70/30 or 60/40) suits transactional, high-volume selling where individual effort directly drives results. High base (80/20 or 90/10) suits consultative, long-cycle selling where team collaboration and customer success matter more than individual deal count. Mismatching pay mix to selling style creates perverse incentives.
- Measure Selection — What you measure determines what reps optimize for. Cespedes identifies three categories: output measures (revenue, units, margin), input measures (calls, meetings, pipeline), and strategic measures (new logos, cross-sell, retention). Most plans over-index on output measures and under-index on strategic measures, producing reps who hit quota on easy renewals while ignoring strategic priorities.
- Quota Setting — Quotas must be achievable but stretching. Cespedes cites research showing that 60-70% of reps should hit quota in a well-designed plan. If fewer than 50% hit quota, the plan demotivates the middle of the bell curve (the largest group). If more than 80% hit, the plan is not stretching and overpays for average performance.
- Timing and Frequency — When reps get paid (monthly, quarterly, annually) and when credit is assigned (at booking, at contract signature, at payment) shapes behavior. Shorter payout cycles drive urgency. Paying on bookings that never collect drives bad deals. Cespedes recommends aligning payout timing with the company's cash flow reality.
- Simplicity as a Design Principle — Reps cannot optimize for what they cannot understand. Cespedes argues for plans with no more than 3-4 measures, clear calculation logic, and transparent quota-to-commission math. Overly complex plans with clawbacks, accelerators, decelerators, and multi-variable matrices produce gaming and confusion rather than aligned behavior.