December 1, 2022

Comp Plans That Work "The Other Documents"


121Silicon Valley

In my last post, we reviewed the document that is the cornerstone of every well-run plan the commission spreadsheet. In this post, well discuss the other two pieces of documentation that are critical to plans that truly motivate:

  1. The English-language description a short description of the logic behind the plan
  2. The legal document in essence, a contract between the sales rep and the company

The English-language description is a cogent, clear description of how the plan works and the logic underlying it, in plain English. Together with the spreadsheet, it provides a complete description of the plan. Some of the elements this description should include are:

  • High-level objectives a few sentences on the management and motivational principles underlying the plans design. For example:
  • Does that company have product mix objectives?
  • Does the company place a value on bringing business in sooner than quota?
  • If the plan calls for accelerated commission rates for over-quota performance, why has the company chosen to do that? (Such plans can get expensive.)
  • Key terms definitions and clarification of important terms and language. For example:
  • When are commissions earned?
  • GAAP revenue recognition? Booking? Collection? Something else?
  • When are commissions paid? When earned? Upon collection? Something else? A combination of the foregoing?
  • The math an English-language description of how the spreadsheet formulas actually work.

A properly written description should rarely take more than two or three pages. I might also add that this is a business document, not an employee relations document this document should be drafted by people in finance and sales, and not by HR staff unless they are highly knowledgeable about incentive comp.

The legal document is a good idea considering the large amounts of money changing hands (God willing!). It should be signed by both the sales person and a senior officer of the company the more senior the officer, the stronger the message of respect for the sales person and importance of the comp plan. In most well run companies, sales reps cant receive commission payments until the signed document is on file. Some of the elements in this document should include:

  • A clear reference to the plan parameters that is, the spreadsheet and the English-language description Ive just described. A simple, efficient approach is to include these documents as attachments to the legal document.
  • A clear reference to the company’s policies and practices, such as its revenue recognition policy and it corporate conduct policy. Some agreements require the sales person to acknowledge that he or she has received and read these policies and practices. Some also explicitly state that violating the revenue recognition policy and some other policies may be grounds for non-payment of commissions and other disciplinary action.
  • The policy regarding splitting commissions.
  • The policy regarding business if the sales reps employment has terminated, or if the sales rep has been promoted or no longer covers the territory for other reasons.
  • The process for addressing compensation disputes or requests for exceptions to the plan.

I don’t feel strongly about the length of this document, because ideally it wont see day-to-day use. However, it doesn’t need to be a legal textbook, either. For example, laying out the procedures for every possible permutation of employee termination or territory change and Ive seen contracts that droned on for several pages on this subject doesn’t serve much purpose. In real life the most complex situations of this type are usually resolved by negotiation and not by the exact words of the contract.

Drafting these two documents is the least fascinating part of the process of creating effective compensation plans. But if you do them right, not only will you have a coherent, manageable plan, but you’ll save an enormous amount of time and trouble when things get complicated.