Advice to CEOs: Put non-sales leaders on variable comp plans, too. How can every single employee that can materially influence revenue have a variable revenue component to their compensation plans? We all agree everyone in sales has to have commissions and highly variable comp structure. What we mean is everyone that materially impacts the plan should have some variable comp.
Excerpt from From Impossible to Inevitable by Aaron Ross and Jason Lemkin
This post will talk about broad-based variable compensation plans. What are broad-based variable comp plans? Broad-based variable comp plans are agreements to pay nearly all of your team-members some variable compensation.
That sounds fancy and complicated.
But it’s dead simple. Just think of it as a commission plan for everybody at your company.
We deployed a commission plan for everybody at Spiff and we’ve seen amazing results including an increase in excitement, motivation, and a feeling of ownership in our company and its vision.
In this post we’ll talk about the power of broad-based variable comp and how to do it at your company.
Here’s a list of the topics we’ll cover:
- You Say You Want a Revolution (in Pay)
- Creating a Broad-Based Incentive Comp Plan at Your Company
- The Power of Broad-Based Incentive Compensation Plans
But first let’s talk about revolutions…
You Say You Want a Revolution (in Pay)
There’s a storm coming, Mr. Wayne. You and your friends better batten down the hatches, because when it hits, you’re all gonna wonder how you ever thought you could live so large and leave so little for the rest of us.
Selina Kyle, The Dark Knight Rises
Great thinkers have been analyzing revolutions since Aristotle. They have proposed many typologies of revolutions. According to Wikipedia, Alexis de Tocqueville differentiated between two kinds of revolutions;
- political revolutions, sudden and violent revolutions that seek not only to establish a new political system but to transform an entire society, and;
- slow but sweeping transformations of the entire society that take several generations to bring about (such as changes in religion).
Let’s assume we could put revolutions into one of these two categories:
- Technological revolutions–where massive change occurs without violence primarily because of technological change
- Social revolutions–where massive change occurs with violence primarily because of social injustice
Startup entrepreneurs are all familiar with technological revolutions. You could think of the graph below as a roadmap to a technological revolution.
Think about smartphones. 15 years ago, early innovators carried around PalmPilots. Now smartphones rule the world.
At Spiff we believe a revolution is brewing around compensation. It’s technological and social. Let’s start with the social.
Income disparities are at all time highs. AI may eliminate jobs which would make the problem worse. In response, Y-combinator and many others are experimenting with basic income projects. Socialism is gaining ground in ways once unimaginable in the US.
The CEO of Carta, my biggest competitor in my last startup (who kind of kicked our butts in many ways) wrote powerfully about the power of broad-based equity grants as a response to income inequality. He quoted Bob Noyce speaking about when Bob founded Fairfield Semiconductor:
“Suddenly it became apparent to people like myself, who had always assumed they would be working for a salary for the rest of their lives, that they could get some equity in a company … that was a great revelation and a great motivation.”
- Not every company can grant startup stock
- Equity is costly to distribute and highly regulated
- After the early startup period, equity grants tend to be small
Now for the positive. Technology is available to make compensation more effective and fair. Technology is allowing us to measure income inequality better on cap tables. There are some amazing companies innovating around motivation and micro-incentives like Motivosity. Others are innovating around increasing the frequency of payments like Everee.
Despite their limitations, broad-based equity plans created a revolution in the early 1960s. We are still seeing reverberations of that revolution today. Almost all companies are becoming more like startups.
Now it’s time for a more modern incentive plan…
There is one motivator that can work for any person at any company at any level of performance at any stage in any geography : variable compensation. It also works no matter how well your company is doing. You can build the plan where it only pays if the company grows.
So how can you join the incentive comp revolution at your company? Here’s how…
Creating a Broad-Based Incentive Comp Plan at Your Company
We launched our own broad-based incentive compensation plan for all Spiff team members. Here’s a picture of how much money I personally made in December 2019 from the plan as seen on Spiff’s mobile app. Everybody in the company made at least as much as I did and many made a lot more.
Here’s how we did it.
- Determine who to include in the plan. Since our sales team already receives commissions we didn’t include them in our broad-based plan. But we included every other person in the company. We are relatively small and we could see some larger companies that may want to exclude contractors, etc. It’s fine either way, but remember if the person’s job contributes meaningfully to your company’s success, there is a benefit in including them.
- Create a pool. We decided to create a monthly pool funded as a percentage of total revenue. We’d recommend this for most companies. It’s simple and revenue is a great success metric for nearly every business. We’d recommend starting small. This could mean anywhere from 0.1% of monthly revenue to 2%.
- Determine the commission logic. We’d recommend keeping the math simple. We give every person a monthly performance bonus based on this formula: revenue pool / number of people in the pool.
- Roll it out. It’s more powerful if you give your team members a way to check their bonus on a real-time basis. You can do this via a shared Google spreadsheet or you can onboard onto something like Spiff. If you have more complex commission plans at your company, Spiff is probably the better option.
I’d love to hear about it if you roll out a plan at your company! Please chat in. We noticed an immediate and powerful impact on our team members.
The Power of Broad-Based Incentive Compensation Plans
Here’s what we found when we rolled out a broad-based variable compensation plan at Spiff:
- More alignment around core business goals
- A greater passion and excitement for our company’s vision and purpose
- A greater a culture of ownership
- Increased camaraderie between sales and every other organization
- A feeling like the company’s success truly is the team’s success
- Increased willingness to help out at odd hours
- More interest in new product release
- Ideas about how to generate more sales