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6 Things to Consider When Building Effective Compensation Plans

March 3, 2020

After more than 30 years in technology I’ve seen many different compensation plans.  Some are better than others of course, but the best all have one common theme.  They are all centered on “Pay for Performance.”

6 Things to Consider

  1. Consider including a variable component to every employee’s total compensation target.

Very few companies do this because it takes more work and is much easier to give someone a set salary. However, if employees have even 5% of their total target compensation linked to metrics such as financial performance, you are likely to see behavior aligned with achieving the end goal of increasing financial returns for both the individual and the company.  If you take that approach with all employees the improved performance adds up.  Additionally, you will see the team starting to hold each other accountable when using company resources, as they have a solid understanding that wasted resources could potentially impact their paychecks.

  1. Compensation Plans should be aligned cross-functionally to encourage the right behavior “across the organization.”

An example of this might be when the VP, WW Sales for an American company is chartered with growing market share by 25% in Europe this year.  30% of his variable compensation is linked to hitting this specific market share goal.  To achieve it he will need help from the VP, WW Marketing to create additional demand.  However, the VP, WW Marketing may not have assigned goals defined at the region level or his variable compensation may be linked to a different set of objectives altogether.  It may sound hard to believe, but I’ve seen it in many organizations. On the other hand, when the appropriate time is taken to ensure the goals are aligned, thus driving the desired behavior across the organization, the efforts are directed and the result is powerful.

  1. Pay your sales organization on “sales out” and not on “sales in.”

Consider paying your sales and marketing organizations when product is sold “through” to the end-customer and not just when it is sold “in” to your dealer or distributor.  This is particularly effective when you are expanding overseas.

It is relatively easy to authorize a distributor in a new market that will purchase your product.  You get your first order from a new distributor and everyone is happy.  Imagine you replicate this a few times and very quickly you have grown this new overseas market (i.e. Europe) and are the shining star in the organization.

In an effort to continue to grow you sign more distributors because your product is not “selling through” as fast as you have been “selling in.”  Inventory is beginning to build in the channel.  You have saturated the market with distributors and have not been focused on making sure the product was “selling through.”  Because inventories have grown and sales are slower than expected you have to take a price reduction on your distributor’s inventories thus resulting in reduced revenues and margins.  I call this the “sales death spiral.”

Under a different scenario, imagine if the sales team responsible for expanding the business had only been paid when the product had sold through to the “end-customer.” The focus from day one would have been to understand the market needs, the competition, and focused on ensuring the product was selling-through and not just selling-in.

This is not a popular approach with sales organizations that have historically been paid on sales in, but it creates far more predictability and sustainability once put into practice.

  1. Only pay salespeople once the company has been paid.

There are two reasons this is a good suggestion.

First, among employees, salespeople typically have the best relationship with their customers.  Therefore, if salespeople do not get paid until the customer pays they have a vested interest in getting the invoice paid, and a better chance of getting it paid because of their relationship.

Second, salespeople are quite often in a position to negotiate payment terms.  It is always easier to get a bigger order from a customer if you extend payment terms.  However, if the salesperson knows they are not going to get paid until the customer pays they are less likely to offer or even discuss extending payment terms.

  1. Subscribe to the KISS (Keep It Simple Stupid) principle when designing your compensation plans.

You do not want employees to need a complex spreadsheet to calculate their variable earnings potential.  It should be very simple and every employee at every position should be able to calculate their earnings with very little effort.

  1. Report performance frequently (at least quarterly) and recognize the top performers across multiple functions.

Do not only recognize the tops sales people, but ask others from other functions what they did to deliver exceptional performance.  This not only delivers a forum for recognizing top performers, but gives valuable feedback to other employees on how to improve performance.


These are just a few of the core ideas you can use in building your own “Pay for Performance” strategy.  Most importantly take the time to do it.  It should not be something you are rushing to finish the day before your new fiscal year starts.  Additionally, ensure it is cross-functionally aligned so you get the benefit of all employees working together and make sure and take the time to explain the benefits.  An aligned organization is a powerful entity.  And best of all, it can be achieved regardless of competition or market conditions.  It’s simply up to you!


Written by: Rod, Partner in our Austin, Texas office, who leads the firm’s global technology practice. Rod is an accomplished C-level executive with significant experience in leading prestigious multi-national corporations around the world for over twenty-five years.  Rod focuses his Search Practice on assignments for CEO’s, COO’s, CFO’s, Board Directors and other senior leadership roles for Technology and Growth companies.

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