Q&A with Matt Haller: Deciphering the Best Incentive Plan Structure for Your Team

Principal Consultant for Composed Compensation, Matt Haller is responsible for designing incentive compensation solutions for his clients. In addition to his role as Principal Consultant, Matt is also the Global GTM Operations Manager at LinkedIn and the host of The Fuzzy Logic podcast. 

The CaptivateIQ team sat down with Matt Haller to discuss the ins and outs of incentive compensation plan structures, including how to think more strategically about plan design, which roles benefit most from pay-for-performance plans, and the hottest trends he’s seeing in the space.

To kick things off, let’s start with what’s probably the most important underlying question here – how do you develop a variable compensation plan that truly incentivizes strategic activities?

When I design compensation plans with my clients, we typically try to break things down into a couple of key questions:

First, what's the risk profile of the role and how much influence does the employee have on the sale? Those two things help us figure out how much of their pay we want to put at risk (i.e. how much of it we want as part of that target incentive versus part of our base salary). 

Factors that go into the base salary are the behaviors that we want from our reps — things like learning and development, making sure that the CRM (Customer Relationship Management) system is up to date, ensuring employees are logging their pipeline accurately, and building a culture of support around them.

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The target incentive is about performance. Here, we ask: how much control and influence does this role have in the plan? If you have more influence, you have more control; therefore, we can probably put a few more dollars at risk for you. Whereas, roles that have less influence in the sale — think about your sales engineers, maybe account management roles that have less influence on the specific moment of purchasing — will have less payout risk because we think of it almost like going to Vegas. If I put a lot of money down on a bet and it pays off for me, I should be able to earn an outsized amount of money. If I have less money down, then I should earn less in an upside, because I didn't put as much risk down. 

Hunters are Account Executives that are typically told, “I need you to go and get me $150,000 of new business.” That's really hard to do and there's a lot of risk, because they could come in at 20% to goal, or they could come in at 200% to goal. When we talk about our sales engineers, account managers, CSMs, etc., those roles are typically either people that work with an AE or they're given a specific book, which means they have less of an ability to impact their number. So we're not going to see as wild swings of performance with those roles and we wouldn't put them on as aggressive of a variable plan as a traditional hunter. 

How do you design and weight some of these different calculations to make up an effective incentive compensation plan?

When we're taking that pay mix, that target incentive that we were just talking about, we want to figure out how we're going to divvy that money up to drive specific sales behaviors. This is when we go from, “How do I structure the overall amount of money I want to pay my reps?” to, “What specifically am I asking them to do?” 

There are a couple of principles that we want to follow for defining the measures and behaviors in the plan. The first one is we don't want to ask employees to do more than three things as part of the plan. Occasionally, you'll see a plan with four measures, but in general we want to stick to three things because it's just easy to remember these are the three things that we care about.

Also, remember that these are the three things your sales organization cares about. There's going to be dozens of other things that engineering, product, marketing, and all the other teams care about that will ultimately influence what the business strategy is. But, there are only a handful of sales behaviors that we want to anchor on and focus on, so that the reps have clarity on what their behavior should look like. 

The second principle defines how to weight those measures. If we want to say how much focus we want to put on this specific set of dollars, then we typically want to make sure that weighting is at least 20% of their target incentive. And the reason we do that is because if you start to have less than 20%, an AE can make up those target incentive dollars in the other measures and ignore one entirely. I've seen that plenty of times where the measures are weighted 5-10% of someone's target incentive, and they say, “Why would I spend time doing that when I could just overachieve on the thing that I'm already good at and make more money there?” So, those are the two things I think about when it comes to the weighting of my measures and setting my clients up for success.

What can go wrong if you don't strike the right balance of these measures?

Yeah, we're all familiar with the Franken-plan, where we go through the sales planning cycle. We try to go through our plan design process. We try to add too many behaviors, too many priorities into the compensation plan at once, and that's where you start to see plans where reps have five or six core measures. We're weighting their target incentive against five or six different things, and ultimately the impact is that all of them become less effective. The overall compensation program becomes less effective because I'm asking my reps to spread their time across so many different behaviors and activities without necessarily focusing on the ones that are really core to our business, our goals, and the ones that are going to move the needle for us.

If a company is just starting to build an incentive-based compensation plan, what advice do you have for its GTM (Go-to-Market) team? 

A variable commission rate against production measures is the gold standard for sales, because it ties business performance — that is measurable — to dollars that I'm going to pay you. 

We typically recommend that if you have the ability to set a quota and you kind of know what a target could look like for your team, you can go ahead and use tiered calculations, because the sales targets almost become kind of like your quotas. It's an imperfect comparison, but you're essentially saying, “Deliver me this, and you will get that.”

If you do not have the ability to set a quota or you're not confident in the quotas that are set, such that 60% of your reps have a reasonable chance of hitting quota, it's totally fine to stick with the flat rate commissions. For example, say, “We'll pay you 2%, we'll pay you 5%, and then pay you 10% of everything that you sell.”

What's nice about taking that approach is we don't have to over rotate on things that are really complex. We don't have to think about a lot of planning and how different quota attainment scenarios or quota distribution scenarios will affect cost. I can just say, “If I sell X, my cost of sales is 5%.” I know what that's going to be from a business perspective, and there's nothing wrong with that. 

Typically, as you get more mature and you have more intelligence, more data, and the ability to dial in expected performance based on forecasting and historical performance, you might move towards a more robust target-based structure calculation.

How do you consider layering dimensions onto a commission plan to further align incentives to business goals – for example, a time dimension such as a Q1 fast-start bonus? 

Remember that we want to ask our reps to think about only so many things at a time. So, if you say, “I want you to sell a product,” that is one thing. If it's, “I want you to sell a product with another product,” that's two things. Then, “I want you to sell this product with another product in a certain time dimension,” is three things. 

We can start seeing how if you start to build that model and then start asking more things on top of that, it becomes harder for the rep to realistically be set up for success. 

That being said, it is totally fair to link those different components together — we see it all the time. I've got products that I want to sell with services and I know that I'm not going to pay my rep until that implementation is done, for example. Because I know that, plus — and, I'm making this up — we have a 95% retention rate after we get the implementation, so that's the point in time when we feel comfortable releasing a payment to the rep. 

And, this is what my old bosses will love to hear: you can link measures and say the amount of money that you make towards one commission rate might change based on your ability to do something else. 

As an example, let's say we're looking at a tiered commission rate as follows:

• Up to $50,000 in new bookings, the sellers gets paid 5%
• For $50,000-$100,000 in new bookings, the sellers gets paid 7%
• For $100,001 and above, the sellers gets paid 10%

Let's also say that this is a product that needs a high services attached rate in order to be really successful with our clients, so we want to incentivize our reps to be selling the software and the services, as well. 

I might say, “If your attach rate on these dollars is 80-100%, I'll double your commission.” I’d start to work through that kind of a structure that says that the way that you do things matters. It's not just about the production number. We also expect that you are going to do this with a certain attachment rate, working with partners, etc. All of those things can help sweeten the deal and say, “This is better for us, so we're going to make it better for you.”

Would everyone benefit from an incentive-based pay plan? 

I think incentive plans can be motivating for anybody, but the plan’s effectiveness will depend on the person. 

For example, you see a lot of athletes going into sales for two reasons. The first is they're comfortable performing. That's kind of their thing. They're also comfortable — and this is important — with the process that it takes to get better at sales itself. And, so those two things relate highly to athletics, and why you see athletes do so well in sales. 

Other employees or other industries might not be motivated by additional income. Maybe they are. I just want to call out: not every person is going to be motivated by an incentive plan. 

That being said, if you want to test the efficacy of an incentive plan, I think a flat rate can be a really great way to go. If you don't have the ability to set a quota today, or you're not really comfortable saying, “I'll pay you more after you hit a certain dollar amount,” then it's a good way to introduce that commission concept to somebody without throwing all of the bells and whistles of a commission plan at them right away.

How do you determine what top sellers should make? What do you think about commission caps or decelerators within a tiered model? 

What I've seen a lot of companies do is pick an upside number. They'll say, “What multiplier of that target incentive that we talked about earlier do I want to target my top earners making?”

Usually for sales reps—like my hunters out there hammering the phones — about 3x is what we want to target for them. What that means is if I've got a plan — a $200,000 OTE plan with a 50/ 50 pay mix, $100,000 in base salary and $100,000 in target incentive—I would expect that the rep who finished in the top 10% at the 90th percentile of my performance would make $400,000. That is 3x the $100,000 plus the $100,000 base. What that does is it gives me a point to measure my top performers and helps me normalize my financial risk. 

That being said, the other way to handle really big payouts to reps is by having decelerators in the plans. I'm generally opposed to caps because it tells the rep to stop selling and you won't get any benefit from that.

What we typically do is after acceleration, at that point when you say that person's made that 3x that we're comfortable with, then we'll take that acceleration rate back down to the original 1x base rate, so that we're not telling people stop selling, but I'm not going to keep paying you with the gravy train as you're continuing to sell.

What is typically considered too large of a quota jump year over year? For example, can a startup go from 3x to 4x in a single year, or would that rankle reps? 

I'm assuming this means that for a $300,000 OTE, for example, you've got about a $1M quota, and we want to get that up to $1.2-1.3M. If that is the case, then how much you increase quotas is a function of how much you expect the business to grow given the market, your pipeline, and your forecast. 

Also consider the systems, tools, and training for the reps. We love to say, “The business is going to grow at 3x next year, and we've also been making these investments to make your time more efficient.”

I think you could get that up to 4x, but the story that you tell the rep is the market's growing at this rate, this is how much we are expecting to grow with it, and these are the other investments that we're making to make it easier for you to put the same amount of effort that you put in last year to increase your bookings. 

How do you make sure bonus incentives are aligned with company goals?  Do you ever need to sandbag or gamify the incentives? 

Every company is different, and it's hard for me to say what’s right or wrong for your specific business. (This is where I get to do a shameless plug to connect with me on LinkedIn and spend time with me to understand a little bit more about your business specifically to give that more detailed guidance.) 

Typically, what we'll tell people is when you cap plans, your reps stop selling. Period. And, when you give them uncapped plans, they keep selling at the expense of next year. 

So you might say, “If I think about all of my reps, and all of their performance, I don't want my best seller hitting 500% of their quota. Even though that might be the best thing for them, I'm going to need that rep's performance next year.”

Incentivize them to pursue things that are really easy—that's why we have some acceleration. And, make it less attractive for them to continue selling, because we want that overachiever to help lay a foundation for the next year.

Any last tips for building bonus incentives with accelerators and decelerators? 

For the love of all things good, please plot your plans out in a line graph before you approve them. I've seen many, many clients go through planning and say, “Here's my rate table. I figured everything out.” 

By drawing out the pay curve on a line graph where I'm plotting the attainment or the performance on the X-axis and the amount of money that we're going to tie to this measure, this specific quota, on the Y axis, we start to see a line that's motivational to the rep and also protecting you from doing things that are bat-shit crazy.

As an example, I have seen certain pay bans or acceleration bans be 5%. So, if you fall between 135% and 140% of your goal, we're going to pay you 3x, but outside of that, there is no acceleration. I have seen that before and it usually happens when somebody's like, “I don't want to have an acceleration bonus.” 

Plotting our plans like this helps us just be really clear that what we're delivering to the field makes sense for sellers and makes sense for the company. 

When might a GTM team want to incorporate commissions for Key Performance Indicators (KPIs) or Management by Objectives (MBOs)? 

Like we said, production measures—your commissions, your commission rates, your quota-based bonuses—are the gold standard because we're tying business performance that we can measure back to pay. 

But, there are also some situations when we just don't have the data and it's harder for us to measure. For example, with multi-year sales cycles, it's hard for me to set a quota because I don't actually know if this deal's going to close this year or next year. This is where KPIs and MBOs can come into play because you're able to focus on things that are outside of traditional production measures but critically influence the sales process. So, set things like KPIs and MBOs for specific milestones you want to do on those multi-year payments. This is a great option because I can still pay people on production revenue, but I'm also giving recognition for the key steps we need to take in the sales process that help us bring in that production.

KPIs can also be really helpful if you're doing anything related to market development. For example, really high level stuff, like talking at five industry trade shows a year, is a good option for an MBO incentive because it's hard to do revenue attribution to those things. Really, it’s about checking the box. Did you do this? Yes or no.

I would not recommend using these for production. Meaning, I wouldn't necessarily say, “I'm going to give you a rating of one, two, or three based on how well you do against your quota.” That will remove the connection between production and pay. 

One last thing I want to call out about KPI and MBO plans is to not make them more than 25% of someone's variable plan, because they can be so subjective. There are some rare cases when the role itself is so subjective that you have no choice, but it is important to call out that these plans are really subjective, so don't overly align on them.

What are your thoughts on KPI or MBO incentives for inputs versus outputs (i.e. what the employee contributes versus what the employee contributions generated)? 

A lot of it depends on the specific behavior you're trying to drive and the sales process. I think adding incentives for inputs when you have a long sales cycle can be a really good thing to have because it's almost like a milestone payment along the way. But, the key there is making sure that those inputs ultimately are the KPIs that lead to revenue. Otherwise, you're paying people to march in one direction that's not necessarily aligned to the rest of your overall program. The  key with driving the overall compensation program is making sure that we are creating the incentives that drive the right behaviors across all of our roles. So if that MBO is going to help either that role or another role get set up for success, it might be something that's worth considering.

What trends are you seeing with your customer base currently, and what do you expect to see within the next 1-3 years?

If we had a nickel for every time we heard we’re living in an inflationary environment, we’d probably be able to retire. 

But…we’re living in an inflationary environment.

This means sales are a little bit lower, and that's giving GTM teams an opportunity to take a step back and breathe—even if it's only for a Friday afternoon—and be able to assess the basics of our commission plans. 

• How are we looking from a pay band perspective? Let’s make sure that we haven't gotten those out of whack. 
• How's our plan administration looking and running?

Those kinds of assessments help us understand the efficacy of our commission program. It may have unintentionally gotten a little bit out of whack over the course of the last couple of years as we've been responding to the craziness, and reevaluating provides you with a foundation or re-establishes a strong foundation in order to build future growth with these incentive plans.

Any other trends worth noting? 

The other thing we are starting to see is the popularity of consumption plans. And what this means is that instead of paying reps on an individual deal (i.e. they sold a contract that was worth $50,000 and that's the amount of revenue credit I'm going to give them), we pay reps on what the customer is actually spending. 

We've seen this in the world of pure-play Cloud. So if you are a customer of Google Cloud, Amazon Web Services or Microsoft Azure, their contracts are structured in a way that you have to spend money based on the amount that you use and their reps get paid based on the amount that their clients are spending. That's relatively a new construct that really came out of those products. And, we're also starting to see them a little bit more with the advent of Generative AI because the way that those products are getting ingested into a lot of different software is by paying based on the amount that is used.

I do want to say do not just jump to consumption plans tomorrow because everyone else is doing it. There is a major question: can we measure how much our reps are using? Our customers are using a concept called metering, which is a critical component into how you measure, pay your reps, and set your quota. So, it is something that's becoming more popular but not something we'd expect you to just start to implement tomorrow.

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