Your Compensation Plan Is Working Exactly as Designed–Just Not the Way You Think

Your compensation plan is probably working.

The more important question is whether it's working toward the result you actually want.

Imagine you own a roofing company.

You want more sales.

So you introduce a contest:

The salesperson with the highest monthly sales volume receives a large bonus.

Sales increase.

The contest worked.

A few months later, operations is complaining about unrealistic promises.

Margins are shrinking.

Customers are disputing details they thought were included.

A few jobs that looked wonderful on the sales report become disappointingly unprofitable.

Your sales manager says the team is performing better than ever.

Your operations manager would like a word.

Nobody necessarily did anything mysterious here.

You rewarded sales volume.

You got sales volume.

Behavior follows incentives

Every compensation plan communicates priorities.

Sometimes those priorities are intentional.

Sometimes they're accidental.

A salesperson earning more money for larger contracts has a financial reason to pursue larger contracts.

A salesperson rewarded entirely at signature has a reason to prioritize getting signatures.

A salesperson whose commission disappears when customers cancel has a reason to care about cancellations.

This doesn't mean salespeople mindlessly chase money or ignore ethics.

It simply means incentives matter.

The question is whether they reinforce the behaviors the company actually wants.

The roofing promise

Suppose a homeowner wants a roof completed before a family reunion.

Your installation schedule is already packed.

The salesperson can explain that honestly.

But the customer may hire another company.

And the salesperson is one large contract away from winning the monthly bonus.

So he says:

“We should be able to make that work.”

Notice what happened.

He didn't necessarily lie.

He probably believes operations can squeeze it in.

But the incentive made optimism financially attractive.

The customer signs.

Sales celebrates.

Operations inherits the promise.

This is an example of incentive drift.

The compensation plan was designed to increase sales.

Over time, the behavior it encourages drifts away from the broader business outcome the owner actually cares about.

A signed contract isn't the whole result

Consider two salespeople.

Salesperson A

Sells $150,000 this month.

Frequently discounts.

Generates several installation problems.

Produces more customer complaints.

Salesperson B

Sells $125,000.

Maintains stronger margins.

Sets accurate expectations.

Produces cleaner projects.

Who sold more?

A.

Who created more value for the business?

We don't have enough information.

That's the point.

Revenue is easy to measure.

Sales quality is more complicated.

If your compensation plan rewards only the easiest number to measure, the organization may eventually optimize around that number.

What happens when the customer's interest and the salesperson's interest separate?

Imagine a company selling residential water-treatment systems.

A homeowner has an odor problem in her well water.

The company offers several systems ranging from modestly priced equipment to expensive whole-house installations.

The salesperson receives a percentage of the sale.

Suppose the least expensive system genuinely solves the homeowner's problem.

The salesperson can still recommend it.

Ethical salespeople do that every day.

But the compensation structure has created a tension:

The customer benefits from buying what she needs.

The salesperson earns more if she buys more.

Good management should at least recognize that tension exists.

One of the central ideas behind a healthy sales structure is that the customer, salesperson, and company should be moving in roughly the same direction.

Help the customer get the right outcome.

Create a fair sale.

Build a healthy business.

Compensation works best when it supports that alignment rather than quietly competing with it.

The easy-to-measure trap

Revenue isn't the only example.

Pay for appointments, and employees may optimize for appointments.

Pay only on individual performance, and teamwork may become less attractive.

Pay bonuses for closing percentage, and salespeople may become selective about which opportunities they pursue.

Pay entirely on top-line revenue, and discounting may feel painless to the salesperson even when it hurts the company's margin.

Again, none of these outcomes is guaranteed.

But compensation changes the math people operate inside.

Pretending otherwise doesn't make the math disappear.

The intention-vs-design test

Here's an exercise I like.

Make two lists.

On the first, write what the business actually wants:

Profitable sales.

Good customer fit.

Accurate expectations.

Low cancellations.

Long-term relationships.

Team cooperation.

Whatever matters in your model.

Then write exactly what the compensation plan mathematically rewards.

Not what management hopes it rewards.

What earns someone more money?

Compare the lists.

I call this the intention-vs-design test.

Any gap between those lists is worth examining.

Compensation isn't always the problem

It's important not to turn every performance problem into a comp-plan problem.

If salespeople don't understand the product, compensation won't fix that.

If leads are terrible, changing commission percentages won't improve the leads.

If managers aren't coaching effectively, a new bonus structure doesn't create management skill.

Compensation is one piece of the structure.

A powerful piece–but still one piece.

The useful question isn't:

“Is our commission plan generous?”

Or even:

“Is it fair?”

Those questions matter.

But there's another one:

“What behavior would a perfectly rational employee produce if they optimized around this plan?”

If that behavior matches what your customers and your business need, you're probably aligned.

If it doesn't, don't be surprised when the plan works exactly as designed.