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An Astronomical Sales Comp Failure

We hear many sales comp horror stories here at SellingBrew–which is why we have resources like this to help you avoid them.  But this story we heard recently is out of this world.  It’s a sales comp plan so bad it actually incentivizes the sales team to slow down revenue growth…

To protect the innocent (and guilty) let’s imagine a beer distributor has a comp plan structured to incentivize year-over-year monthly growth. Each salesperson gets a monthly bonus if they sell 5% more in their territory (by revenue) over what was sold in the same month in the previous year. The bonus is a fixed amount, it doesn’t scale with growth—you either hit the target and get the bonus or you don’t.

At first blush, it sounds reasonable. The sales team is naturally incentivized to continuously improve their monthly year-over-year sales. But sometimes the best case scenario for growth can be the worst-case scenario for a sales comp plan.

Here’s how…

Imagine your beer distribution territory is rural with a relatively low population. But your territory happens to be right in the path of a total solar eclipse. This once-in-a-century opportunity means people will flock to your little rural territory. And many of those people will want to buy beer to drink while they stare at the sun.

All those people pouring in should make it easy to hit that 5% growth target, right? In fact, as the month goes on, you’re stocking so much on the shelves that you realize you should be able to get to 25% or 30% this month!

But wait… The more sales you make this month, the more you’re hurting your chances of getting a bonus again in 12 months. Sales this month are bigger than you’ve ever seen…by far. You know you won’t be able to get a 5% improvement on these inflated numbers again next year.

So what’s the smart salesperson to do? Put the brakes on. Don’t restock the shelves as often. You’ll still hit this month’s bonus target, but at least you won’t make next year’s bonus unattainable. After all, since it’s a make-or-break bonus, there’s no benefit to you for any growth over 5%.

But here’s the best (or worst) part of this story… After managing to dampen sales in your territory, revenue is up 8% for the month. Management is over the moon with the year-over-year growth and happily pays out that fixed-amount bonus. But they’re oblivious to what the growth could have been. If they were happy with 8%, imagine how great the bottom line would be with 30%?

But as the salesperson, there’s no incentive for you to reveal what the actual growth could have been.  Everyone stays happy.  You get the bonus, you made it plausible to get another bonus in 12 months, and management saw unexpected growth in revenue.

That’s what makes this such a horribly bad comp plan. Most bad sales comp plans get exposed when sales doesn’t hit the numbers. But this comp plan could be a hidden anchor holding back growth for years and management would never know the difference.

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