Commission Is Strategy

A company writes two documents that describe its strategy. One is the deck, full of words like premium and differentiated and value-led. The other is the commission plan. When those two documents disagree, the commission plan wins every time, because only one of them shows up in somebody's mortgage payment.

I have designed sales compensation from a blank page once and inherited it once, and the second taught me more than the first. What follows is the reasoning behind a plan I built for an armored vehicle manufacturer, why several parts of it look wrong until you see what they were built to prevent, and the plan I deliberately chose not to rewrite at a company where changing it would have cost more than it returned.

Section 01The plan is the strategy, whatever the deck says

Steven Kerr published a paper in 1975 with a title that has never needed updating.¹ On the folly of rewarding A, while hoping for B. His argument was that organizations routinely install reward systems that pay for one behavior while leadership publicly hopes for a different one, then express surprise when people do the thing that pays.

Sales compensation is where this happens most visibly, because the feedback loop is short and the money is personal. Consider the most common plan in existence, a flat percentage of revenue. It is simple to explain, simple to administer, and it quietly tells every rep on your floor that a discount costs them almost nothing. Give away fifteen points of price and your commission drops by fifteen percent of a smaller number. You still get paid. The company absorbs nearly all of the loss.

Now put that plan next to a strategy deck that says the company competes on quality rather than price. The two documents are in open contradiction, and the sales floor is not confused about which one governs. They read the plan.

This is not a story about greedy salespeople. It is a story about arithmetic. A rep with a family and a number to hit will find the shortest path to the number, and if the shortest path runs through your margin, you built that road yourself. The plan is not a payroll mechanism. It is the most honest statement of priorities a company produces, and it is read more carefully by the people it governs than any other document leadership writes.

Section 02Paying more for holding price

Texas Armoring sold bullet resistant vehicles to heads of state, executives, diplomats and families who had a specific reason to want one. We priced roughly twenty five percent above the category, and the market paid it, because the engineering underneath was genuinely different. That premium was the whole business model. Protecting it was the plan's first job.

So the structure inverted the usual incentive. A rep started at a healthy commission on the base conversion and earned less for every point of discount given away. Sell at full retail on the strength of the product and a single close could pay a couple of thousand dollars. Discount your way to the same signature and you funded the discount yourself.

The second decision mattered as much and gets overlooked. We did not use one flat percentage. Acceptable discount ranges were banded, with a floor, and the bands varied by armoring level and vehicle type, because a single percentage is one number pretending to describe a dozen different margin structures. A discount that is survivable on one package is ruinous on another, and a plan that cannot tell the difference teaches reps to find the packages where the math works in their favor rather than the packages that fit the client.

Banding also made the plan feel fair, and fairness is not a soft consideration. A plan reps believe is rigged does not get followed, it gets gamed, and the gaming is invisible until you notice that everyone is somehow selling the same configuration. When the bands track real margin, holding price stops feeling like an arbitrary rule handed down by finance and starts feeling like the obvious way to earn more.

Over the years that followed, average discount off list fell from a range of seven to eleven percent down to five to eight. That figure understates the result on its own. We raised list pricing about twenty two percent between 2010 and 2018, so the company was charging materially more and conceding less at the same time. Win rate on qualified opportunities went from sixteen percent to thirty six. Reps at or above quota went from a third to nearly two thirds.

Section 03Paying less on purpose

Here is the part of the plan that looks like a mistake. Optional equipment carried a commission rate deliberately lower than the base conversion.

Every instinct says to do the opposite. Options are high margin, they lift contract value, and paying reps generously to sell them looks like free money. The problem is that options are not free to build. Every added system lengthens the build, introduces integration work, and creates a delivery date the client has already told their family about. Pay full freight on options and you have bought revenue with schedule risk, and the client does not experience that risk until it lands on them personally, six weeks late.

A marketing executive designs compensation for the booking. An operator designs it for the delivery. I had the operating mandate as well as the commercial one, which meant the late vehicle was going to be my problem twice, and that changed what I was willing to pay for.

The lower rate did not suppress options. It aimed them. Reps sold the systems that genuinely fit the client rather than working down a catalogue, and clients could feel the difference between a recommendation and an upsell. We also rebuilt the catalogue itself, because the original list was small, underpriced, and offered inconsistently, so profitable equipment routinely went unmentioned. We expanded the menu, put the proven options on every proposal as a matter of process, and tied them to the plan at that deliberately modest rate.

Section 04Give the rep something cheaper to spend

A negotiation reaches a point where the buyer needs to win something. That moment arrives in almost every deal, and what happens next depends entirely on what the rep has available to give.

If price is the only currency in the room, they will spend price. Not out of weakness, but because a deal that closes at a discount beats a deal that does not close, and the rep is the one standing there. So we stocked a second currency. A small set of low cost, low maintenance options could be handed over at no charge with no commission penalty attached. The rep got to be generous, the client got a real concession, and the base conversion stayed intact.

The cost to the company was trivial. The effect on the plan was not, because it removed the situation where holding the line required a rep to personally absorb the tension of saying no.

Section 05The half that arrives later

The mechanic I would carry into any commercial organization is also the one that gets the most resistance when I describe it. Commission was split in half. Fifty percent paid when the deposit landed. The remaining fifty percent paid when the vehicle was finished and the final balance was collected.

Reps do not love this at first. It is worth being direct about why it is right anyway.

The first effect is cash flow, and that one is obvious. The company was not funding full commission on a build that would take months to complete and collect. The other three effects are the reason the mechanic exists.

1. The closer stops being a hunter. A rep whose money is only half paid does not disappear after the signature. They stay with the client through the build, because the client's satisfaction and the final payment are now the same event on their own compensation statement.
2. Collections stops being someone else's job. Nobody chases a final balance more effectively than the person whose remaining commission is attached to it. We never needed a collections function to work the way most collections functions work, because the incentive had already been placed with the person who had the relationship.
3. Sales walks onto the production floor. This is the one that mattered most. A rep with money riding on completion has a direct personal stake in the work order matching what was actually sold. They check. They catch the omission before it becomes a change order and a delay, and they do it without being told, because the alternative costs them.

That last effect is worth sitting with, because it solves a problem most companies attack with reorganizations. The seam between what sales promises and what operations delivers is expensive, and the usual remedies are process, meetings and escalation paths. A split payout removes a good portion of it without touching the org chart at all. The rep is already motivated to care about delivery, so the handoff has an owner on both sides of it.

One further note on structure. Quarterly bonus targets existed and were designed without the punitive mechanics that are common elsewhere. No retroactive quota inflation after a strong quarter, no penalty disguised as a stretch goal.³ Anyone who has carried a bag recognizes those tricks instantly, and a plan that refuses them buys more trust than the money involved would suggest.

Section 06The plan I did not rewrite

Twelve years later I joined a networking hardware manufacturer that had been operating for two decades. The inside sales team was compensated on a percentage of gross revenue, the structure was old, and the expectations around it were older.

By the reasoning in this essay, that plan had a flaw I had spent years designing around. I left it alone.

Changing a compensation structure at a mature company is not a design exercise, it is a political one. Every rep has built a personal financial model around the existing plan. Rewriting it while simultaneously running a manufacturing reshore and a full commercial rebuild would have spent trust I needed for both, in exchange for a benefit I could get another way.

So I went after the behavior instead of the formula. Reps were coached on the direct arithmetic connecting gross margin to their own commission, which was already true under the existing plan and simply had never been made explicit. We built a tiered pricing structure across distributor, wholesale and retail levels with minimum advertised pricing enforced, so the channel could not undercut itself and advertised prices held. That did more for realized margin than a comp rewrite would have, and it cost no political capital at all.

For the partner channel, where I did have room to design, we used promotional incentives paid directly to the partner reps making recommendations, with volume thresholds attached. Those consistently lifted unit volume between ten and fifteen percent per product while running. We ran them quarterly and intermittently on purpose, because the limited window is most of the motivation, and a permanent incentive is just a discount with extra administration.

Average contract value rose thirty five percent over that period, and average sales cycle length fell twenty two percent. Neither number required touching the commission plan.

Section 07Reading your own plan

If you own a commercial organization, your plan is already telling your team what you want. Three questions surface the gap between that message and the one in your strategy deck.

1. What does the plan pay for that the strategy says you do not want? Discounting is the usual answer. Volume over fit is the next. Write down the behavior your strategy claims to reject, then trace whether the plan makes it profitable for the individual.
2. What is free? Anything that costs a rep nothing will happen constantly. Long payment terms, unusual configurations, aggressive delivery promises. If none of it touches their compensation, all of it is free, and free things multiply.
3. When does the money land relative to when the customer is actually served? If the entire commission pays at signature, you have defined the job as getting a signature. Everything after that is somebody else's problem by design, and the customer will experience it that way.

The third question is the one most worth acting on, and it is the least common. Most plans pay in full at the moment of least information, when nothing has been built, delivered or collected. Moving even a portion of the payout to the point where the customer has actually received what they bought changes what the role means.

Goodhart's law says that a measure stops being a good measure once it becomes a target.² Compensation design is that law applied deliberately rather than suffered accidentally. You are going to turn something into a target whether you think carefully about it or not. The only question is whether the thing you targeted was the thing you actually needed.

A commission plan is not an administrative document. It is a strategy written in the only language that reliably changes behavior, and your sales floor has already read it more closely than your board has.