However, when the big deal happens or a rep over-achieves quota and it’s time to pay up, the “pucker factor” always appears. Somewhere between designing compensation plans that reward peak performance and actually paying for the performance, buyer’s remorse sets in and the CEO starts asking questions.
- Is this too much money to pay a rep?
- Will this kill my margins?
- Does the rep really deserve the money?
- Did the rep really earn it?
The interesting thing about the above questions is that they are rarely asked during compensation design sessions.
Why? The Reptilian Brain vs. The Neocortex
How the human brain works:
There are 3 main systems in the brain: Reptilian Brain, Limbic System and Neocortex.
- The reptilian brain is at the base of your skull. Its main role is managing survival instincts like fighting, fleeing and eating. It operates quickly and without conscious thought.
- The limbic system sits on top of the reptilian brain and regulates emotions like fear, love, empathy and respect. This allows (most of) us to be socially conscious with our communication.
- Finally, the neocortex is the largest part of the brain and is used for complex reasoning and logic. It’s large (~85% of the entire brain), but slow. In cases of panic, fear or distress, signals never make it to the neocortex and are managed by the reptilian or limbic systems.
The reason the above questions don’t get asked during compensation planning is because people use the neocortex and design plans through reason and logic. When the plan takes a turn down the path of massive individual payouts, the reptilian brain takes over and the fight for survival kicks in. In the case of the CEO, survival equals EBITDA. “Can I deliver the EBITDA with these enormous payouts?”
If the answer to the preceding question is affirmed, the thought process travels to the limbic system, where emotion comes into play. Feelings such as “that rep is a turd” or “she doesn’t deserve that much money” begin to play a part. Often, this is where the internal monologue concludes and the rep ends up with a smaller commission check.
So, how do you avoid operating on your reptilian brain and make logical decisions about your sales compensation plans? Download the Reptilian Brain Assessment to see if your lizard brain is taking over.
Here’s what to do with the output:
Is this too much money to pay a rep? The cost of sales threshold is set at 25%. What this means to you is that anything below a cost of sales (base + variable) means you should not modify the plan. If it is well above this, you need to consider what type of plan you designed and what the potential costs will be to make a mid-year change. Unless this is drastically out of order, I recommend biting the bullet and making your changes next year. Use your neocortex and act on rational thought, not kneejerk reactions.
Will this kill my margins? The variance here measures the EBITDA average the rep’s sales generate in relation to the company average. You’re testing the value of the revenue the rep brought into the company. If you are more than 25% below the company average, time to take a look at how this rep arrived at their numbers. If they are within those parameters (and certainly above the company average), use your neocortex and pay the rep.
Does the rep really deserve the money? This has nothing to do with your comp plan. Ignore it and remove subjective bias from your thinking. You are in the limbic system and acting on emotion.
Did the rep really earn it? See above. Elevate your thinking and remove emotion from the equation. If reps aren’t “earning” the money, you have a role clarity problem, not a comp problem.
In the end, our recommendation is to pay the rep what they earned. If you feel you are overpaying your sales team, validate that against objective benchmarks and change the plan next year. If decide you want to modify your sales compensation plan to trim commissions, prepare your lizard brain for its next big test: turnover.