Incentive compensation plans, and sales commission plans in particular, are really, really expensive. In many enterprises, especially high-growth high tech companies, they are the single largest expense line item after salaries. Not only are they expensive, they are often complex, and difficult and time-consuming to administer unlike salaries, which are administered pretty much the same way across many companies, the things that make every business a little different make every businesss incentive comp plan a little different and require special handling. Even so, most well-run companies make extensive use of incentive comp plans.

Why? Because they work!

But because incentive comp plans are so expensive and complex, its critical to get them right. Small, sometimes subtle mistakes can mean a lot of money goes to waste or can even point a promising business in the wrong direction. So for the next several weeks, were not going to focus on how to do comp plans right, but on not doing the wrong thing. Its critical to avoid boneheaded comp plan ideas; here are some examples:

  • Tying compensation of overly subjective or downright unmeasurable results
  • Binary schemes - these are either/or schemes, like getting a $20,000 bonus for achieving 100% of quota, but you get nothing if only do 99.9% quota.
  • Recoverable draws - its a little more complicated, but theyre usually a bad idea.
  • Fratricidal comp plans - comp plans that are in conflict with each other. For example, plans that cause the end-users sales rep to get into a pricing war with channel sales reps, whose channels might sell to the same end-user.

There are, of course, plenty of other well-meaning, thoroughly documented, meticulously administered, but nevertheless boneheaded compensation ideas. Stay tuned.