Webinar Recap featuring Donya Rose, Managing Principal from The Cygnal Group
Sales compensation is one of the most critical aspects of building a successful sales organization. Many early-stage founders stumble into compensation plans that seem fine in year one but create serious problems by year three. In this comprehensive webinar, sales compensation expert Donya Rose shared battle-tested principles for designing comp plans that motivate, focus, and scale with your business.
Foundations of Sales Compensation
What Sales Compensation Plans Actually Do
Before diving into mechanics, it’s essential to understand what a well-designed sales compensation plan creates for your business:- Motivated Salespeople
- Provides extra motivation beyond base salary
- Creates right risk/reward balance
- Offers meaningful upside opportunity
- Uses straightforward compensation mechanics
- Focus on the Most Important Sales
- Not all sales dollars are equal: some have higher margins, others have more strategic value
- Directs effort toward right customer categories, deal sizes, and configurations
- Guides salespeople on which offerings to prioritize
- Collaborative Work Style
- Defines how you want selling to happen (individually vs. collaboratively)
- Aligns team behavior with company needs
- Ensures proper involvement of specialists when needed
- Value Creation
- Ensures reasonable return on compensation investment
- Creates appropriate cost of compensation at all productivity levels
- Makes plans manageable to track, report, and administer
The framework also serves as a diagnostic tool. If salespeople aren’t motivated enough, look at risk/reward balance and upside opportunity. If they’re not focused on the right sales, examine your measures and performance standards. If collaboration is lacking, review how plans measure and credit team versus individual performance.
Designing Effective Sales Compensation Plans
The 10-Step Process
Designing and deploying a sales compensation plan involves ten critical steps:- Roles & Eligibility – Who should be on incentive pay?
- Pay Structure – How much total cash and what mix of base vs variable?
- Measures and Weights – What should we measure and in what proportions?
- Plan Type and Timing – Commission vs. bonus? How frequently do we pay?
- Initial Payout Tables and Curves – How does performance translate to payment?
- Plan Testing – What outcomes does this produce under different scenarios?
- Final Detailed Plans – Refine based on testing results
- Approval – Get necessary sign-offs from leadership
- Plan Docs and Rollout – Create written documentation and communicate effectively
- Administration & Governance – Execute payment and manage ongoing
Key Principles from Behavioral Science
Research shows that incentives and rewards are most effective when they:- Benefit both employee and employer – Not perceived as punitive or scary
- Focus on challenging activities – Don’t pay for things people will do anyway
- Tie to specific, reasonable, objective, attainable standards – Goals must be practical and achievable
- Include celebration of successes – Recognition matters beyond just money
Key Principles and Best Practices
Determining Eligibility for Sales Incentive Pay
Not every role should be on a sales incentive plan. Sales incentive plans are expensive to design, communicate, and administer. They should only be used when conditions create value for the business. Four Key Factors for Eligibility:- Direct Influence Over Buying Decisions
- Influencing customer purchases is their primary job function, not occasional
- Measurable Productivity
- Individual or team productivity can be measured reliably
- Measurements directly link to financial results for the company
- Results Are Critical
- Willing to pay incentives to producers even in years when the company misses goals
- Delivery of results is that important to the business
- Taste for Risk and Upside
- People in the role have tolerance for personal risk
- They’re excited by handsome rewards for outstanding results
Understanding Performance Standards
Three performance levels must be defined for each role: Target Performance- Expected productivity for a typical, on-target performer (not a rockstar, not a problem)
- What someone can achieve after getting their legs under them
- The middle-of-the-road performer doing just fine
- 90th percentile performance – top 10% of your salespeople
- If you have 5 people, it’s the best anyone does over a two-year period
- Not the absolute best ever possible, but very, very good performance
- Level below which you’re not sure you need to keep that person
- Usually around 50% of goal when excellence is 150% of goal
- Equally balanced around target with excellence
Understanding Pay Structures
The Three Components
A pay structure consists of three elements that work together:- Target Cash Compensation (TCC)
- Total cash from all payments for the at-target performer
- Includes base salary, commissions, and bonus payments
- Excludes benefits and expenses like company automobiles
- Pay Mix
- The relative split between base salary and variable pay at target performance
- Expressed as a ratio (e.g., 60/40, 50/50, 75/25)
- Leverage
- Additional upside earned by excellence performers
- Expressed as a leverage factor (e.g., 2.0x means earning twice the target incentive amount at excellence)
Setting Target Cash Compensation Levels
TCC should be based on multiple factors:- Historical total compensation for people currently in the role
- Total compensation for comparable roles within the company
- Total compensation for subordinates and immediate managers
- Market pay rates for comparable roles in your competitive labor market
- Total compensation needed to attract new people based on recent hiring efforts
- Any recent attrition of solid performers citing pay issues
How Base and Variable Pay Should Vary
Base Pay:- Varies within a role by +/- 20% from midpoint
- Based on persistent attributes: skills, experience, leadership, long-term potential
- Changes gradually (maybe 3% annually), not dramatic year-over-year shifts
- Expected to vary significantly, from almost zero to 2-3x target
- Changes based on current year sales results
- Reflects performance that’s directly controllable by the salesperson
Understanding Pay Mixes and Their Impact
Role Prominence: The Key Determining Factor
Pay mix (how much base vs. variable) should be determined primarily by role prominence: the degree to which the customer’s decision to buy is influenced by the individual seller. Higher Prominence Indicators:- Sale requires seller’s initiative, creativity, and individual skill
- Seller’s personal network plays a significant role
- Limited existing brand recognition or collateral
- Fewer people involved in closing the deal
- Strong existing brand and marketing presence
- Well-developed sales collateral and systems
- Multiple people involved in the sales process
- Lowest price offering in market
- Established buying patterns where customers seek you out
The Motivation vs. Control Trade-off
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Strategic Implications for Business Value
The pay mix choice has long-term business value implications: Very early stage businesses, when you hire that first seller, it may make sense to go for this person who’s gonna be running their own business inside your company. By the time you’re looking for an exit, if you’re considering buying a business, if what they’ve got is 10 rockstar sellers who are all selling their own way and running their own business inside that company who could leave and take the business with them, then you’ve got one valuation. If on the other hand, you’ve got a selling system that you can plug people you can find in the world into, and get pretty predictable outcomes, and you’re consciously competent—you know what the value proposition is and you know how to teach it—then that business has a higher value because the business is not at risk with the exit of a single rockstar seller. Bottom line: You may need to start with high-variable plans, but move toward more balanced pay mixes (around 50/50) as soon as the company—not individual rockstars—owns the customer relationships.Strategies for Transitioning Pay Structures
Moving from High Base to Higher Variable
When you have too much compensation in base salary and need to shift toward more variable pay, you have several options:- Gradual Transition (3-Year Approach)
- Give no base pay increases for three years
- Put all increases into variable pay component
- Shifts pay mix by approximately 5 percentage points per year
- Drawback: Glacial pace for most early-stage companies
- Add Variable Pay
- Simply increase total compensation on the variable side
- Drawback: Often results in overpaying versus market
- Earn-Through Mechanism (Recommended for Faster Transition)
- Current state: $85,000 base + $15,000 target incentive
- Take the $15,000 that should be variable but is currently in base
- Calculate variable pay based on $30,000 target incentive
- But guarantee the $85,000 base for one transition year
- Salesperson must “earn through” $15,000 before receiving incremental variable pay
- After one year, reduce base to $70,000 and move to full 70/30 plan
- Gives salesperson time to experience the new plan and decide if it works for them
Moving from 100% Variable to Balanced Mix
The challenge here is avoiding “double pay” where you’re paying for historical sales at old rates while adding new base salary. Solution 1: Let the Tail Run Out- Continue paying on old sales at historical rates
- Pay new sales (after base increase) at lower rates
- Calculate and accept the cost of the overlap period
- Calculate the forward value of commission tail on old plan vs. new plan
- Determine the delta between the two
- Offer to buy out the tail delta at a discounted rate (often 50 cents on the dollar)
- Salespeople often accept immediate payment over future uncertain payments
- Convert fully to new plan simultaneously with base pay increase
Refreshing Compensation Plans Over Time
The Control Panel Analogy: “I think of it as kind of a control panel with knobs on it. We’ve got a knob here for ARR and we’ve got a knob for new business and we’ve got a knob for multi-year or whatever your knobs are.” Major Redesign (Every 3-5 Years):- Happens when strategy fundamentally changes
- “Ripping out the console” and changing which knobs you have
- Installing new measures or completely restructuring roles
- Turning existing knobs without replacing them
- Adjusting weights between measures
- Tweaking thresholds and accelerators
- Responding to new products, market changes, or resource availability
Designing Effective Compensation Plans
Assigning the Right Measures
Once you have your pay structure established, you need to assign incentive measures that are:- Aligned with key accountabilities from the role profile
- Directly influenced by the salesperson in the role
- Measurable with at least 2 quarters of history
- Three or fewer in number to maintain focus
Types of Measures
Volume Measures (Always Include):- Top-line value: bookings, orders, revenue, cash collected
- Number of units sold
- Margin dollars
- Market share
- New customer acquisition
- Sales of strategically important offerings
- Margin percentage
- Team measures of volume or quality
- Lead referrals
- Strategic Sales Objectives measuring prospect actions
- Pipeline development
- Customer satisfaction
Weighting Your Measures
Key Principle: Weights should reflect the relative time or focus expected of the salesperson. Example: If you want someone spending two days per week (40%) on new business and the rest of the time supporting existing customers:- 60% weight on existing customer sales
- 40% weight on new business sales
- All weights should be at least 20% of the total
- Anything weighted under 20% sends an “unimportant” message
- Everything must be funded out of the target incentive (no add-on Sales Performance Incentive Funds “SPIFFs” or kickers funded separately)
Advanced Compensation Plan Techniques
Understanding Payout Curves
Payout curves define how much salespeople earn as a function of performance against goals. All curves share common characteristics (nothing paid for no sales, 100% of target paid at 100% of goal), but the shape of the curve “sends messages” about what matters:
The Strategic Use of Deceleration
“I would challenge you to make [the acceleration rate] high enough that you in fact would be unwilling to continue at that rate indefinitely. So when your salesperson says, ‘Wait, you’re reducing my rate over 150% is that my stopping place?’ The answer is: You would never have seen this juicy rate if we couldn’t reduce over 150%.” The deceleration strategy:- Creates “bait” in the comp plan at the acceleration tier
- Allows higher rates in the acceleration zone because it’s not sustained forever
- Remains fair because the plan is still better than a straight line until very high performance levels (often 200%+)
- De-risks the plan for extraordinary windfalls
Goal-Setting Accuracy and Curve Shape
The shape of your payout curve should reflect your confidence in goal-setting:
- High quota accuracy → Steeper curve around quota (sharp rewards/penalties at 100%)
- Medium quota accuracy → Moderate curve with reasonable acceleration
- Low quota accuracy → Gentler curve, broader acceleration zones
Payment Frequency and Timing
More Frequent Payouts Are Generally Better Because They:- Maintain high awareness of key business goals
- Improve motivation with rewards offered soon after results
- Enable sales management to coach and intervene earlier
- Create more opportunities to celebrate successes
- Needed to align with business reporting periods for reliable measurement
- Target payment amount is too small to be meaningful more frequently
- Cost/effort to calculate and pay is prohibitively high
- Sales cycle is long (quarters or years)
Crediting Trigger and Payment Timing
When should salespeople receive credit and payment? The answer depends on when the sales job is “done”: Finish paying once:- The salesperson has completed most responsibilities for the sale
- The value of what they’ve sold is clear
- Order Intake – Typical in larger companies with dedicated new business roles, stable processes
- Product Shipped/Service Delivered – Most common crediting trigger across industries
- Revenue Recognized – Common for software, especially account management roles
- Cash Received – Earlier stage companies where funding commission requires cash, or markets with collection issues
Testing and Implementation
Before finalizing any compensation plan, rigorous testing is essential: Incumbent Modeling:- Calculate what each current salesperson would have earned last year under the proposed plan
- Identify winners and losers—is that acceptable?
- Calculate performance required next year for each person to earn as much as they did last year
- Answers: “What does this do to/for my best salespeople?”
- Test the plan under multiple scenarios (all at goal, expected distribution, all under, all over)
- Measure sales compensation as percent of revenue
- Measure sales compensation as percent of gross margin
- Ensures the plan creates value for the business at all likely performance levels
- Answers: “How will this change comp costs relative to productivity vs. prior years?”
