Compensation Exceptions: How Deal Overrides Hurt Plan Integrity and Culture

Sales compensation plans set the expectations that drive behavior. Well-designed plans protect margin, align revenue teams to strategy and motivate high performance.

But too many companies sabotage their plans by making too many exceptions at the deal level.

When exceptions are rare, they can be managed. But when deal overrides become routine: 

1.Margins get hit
2.Forecasting suffers
3.Plans stop guiding behavior
4.Culture is damaged 

Sales leaders know their plan has problems when reps start negotiating commissions during deal closing.

Successful revenue organizations approach compensation plan design with the same rigor as other operating plans. But nowhere is governance more critical than dealing with compensation exceptions.

What Are Deal Exceptions? 

Deal-level compensation exceptions happen when sales leadership makes manual adjustments to the incentive plan rules to “reward” reps, secure strategic accounts or placate executives.

Reasons for compensation exceptions include: 

1.Manually increasing commission percentage rates
2. Issuing strategic deal accelerators
3.Paying commission on non-commissionable revenue
4.Issuing retroactive quota credits
5.Giving credit for deals where the sales rep did not originally get paid

Exceptions are sometimes warranted, but allowing frequent deal overrides creates several negative operational and behavioral repercussions that most companies don’t realize.

Cost of Overrides 

Manual overrides have a significant financial impact. 

As compensation exceptions become normalized across the sales organization, forecasting commission expense becomes difficult, if not impossible.

Imagine a SaaS company that pays reps 10% commission on annual recurring revenue. An enterprise deal closes and leadership agrees to give the rep a bonus to close the deal. The problem? The deal closed at a 20% discount. 

To incentivize the deal, the executive team approves a one-time override to pay commission on the list price of the deal instead of the discounted contract price.

Sure, it seems like a decision to boost moral, but accountants see it as paying:

Commission on revenue that doesn’t exist 

1.Increasing cost of sales
2.Violating the established commission % to revenue ratio 

Now extrapolate that example across an entire fiscal year. If 15% of large deals are approved with commission overrides, annual compensation spending may vary by 5-8%+.

After a year or two of frequent exceptions, Finance loses confidence in the accuracy of commission expense. Months of cross-functional meetings are spent battling Sales, Finance, and Revenue Ops.

Behavior Changes 

Compensation plans change how employees behave. They provide guidelines on where the organization wants sales teams to focus their efforts.

Take margins for example. A plan can be configured to encourage high margin deals by offering higher commission percentages on deals above a certain margin percentage.

Let’s say your plan provides an increased commission rate for deals over 65% gross margin. The company closes a large strategic deal that only grosses 50%, but is pivotal to the company’s annual plans. Executives decide to make an exception and pay the rep as if the deal hit margin expectations.

Employee Perception: 

“The deal was celebrated, so margin doesn’t really matter. Just get me the revenue.” 

What started out as a strategic deal to boost top line revenue morphs into volume only reps contacting leadership for overrides when large deals don’t meet margin expectations.

Selling behavior is skewed when deals are repeatedly made based on executive discretion.

Operational Challenges 

Another consequence of frequent exceptions is how deals are managed within commission systems.

Modifying deals to “make plans” creates manual transactions that require special handling. This means additional work for Revenue Operations to process overrides through sales compensation systems.

When exception transactions become normal: 

1.Audit logs get cluttered
2. Approval processes bog down
3.Dispute rates climb
4.Commission reporting and payroll take longer to process

In a mid-market software company, over 22% of commission disputes were tied to manual override transactions. The problem wasn’t faulty commission calculations. It was subjectivity and interpretation of when to approve “special cases.”

Loss of Trust 

Fairness and transparency are pillars of compensation program effectiveness. Compensation exceptions especially discretionary ones create an illusion of unfairness.

Executives may believe they are rewarding top performers with “executive discretion” payments. But what do other employees think? 

“I have to hit plan and he just gets paid whatever they want him to?”

Lack of fairness: 

1.Lower Morale
2.Breeds internal competition
3.Decreases trust in leadership
4.Prompts under selling behavior 

Employees will always question why certain individuals receive special treatment and others don’t. As the saying goes, it takes years to build trust, seconds to break.

Bad Data 

Revenue leaders rely on compensation plan data to assess performance. How are quotas distributed? Where are payout accelerators hitting? Is salesperson productivity improving? 

Once you start making exceptions to your plan, you’ve poisoned your ability to make quantitative decisions.

If 18% of all deals have manual adjustments what does that say about:

1.The effectiveness of your accelerators?
2.Whether quotas were set correctly?
3.Sales performance distribution? 

You can no longer benchmark your plan accurately, forcing leaders to make qualitative decisions.

“This quarter was tough, so we increased payouts.”

Your plan officially becomes garbage. 

Stepping in Quick Sand 

At first it’s okay to make an exception. “It’s only happened once.” 

Until it happens again. And again. Before you know it, managers feel entitled to override commission plans. Reps will start negotiating commissions alongside delivery terms.

“They know I deserve it.” 

When a formal plan is ignored regularly, the whole thing falls apart.

Exceptions as Opportunity 

Commission plan integrity isn’t lost overnight. Exception spills happen when leaders lack a structured way to review, approve or reject exception requests.

Sales teams NEED flexibility. Leaders just need to make sure there’s a formalized process for reviewing exceptions.

3 Steps to Control Exceptions 

1. Formalize Exception Approval 

First, define what qualifies as an exception. Not all exceptions are created equal. 

Examples of legitimate exceptions include: 

1.Deals approved by board of directors
2. Revenue from acquisitions
3. Transformational enterprise deals spanning multiple years 

Being explicit about what qualifies as an exception helps limit subjective judgment during the review process.

Finance teams should track % of revenue attributed to exceptions. If payouts from exception transactions exceed 5% of total commission spend, it’s time to revisit plan design.

2. Audit and Report Overrides Quarterly 

Tracking exceptions is only half the battle. Exception metrics should be monitored quarterly to ensure leadership is aware of manual overrides.

Reporting metrics should include: 

1.% of total commission revenue derived from exception transactions
2. % of commission dollars paid from exception transactions
3. Margin impact of commission exceptions 

Finance should escalate when any of these metrics exceed planned thresholds. Not every deal needs a strategic deal modifier.

3. Iterate on Plan Design 

Avoidance isn’t always the answer. If your leadership teams consistently approve exceptions for deals that hit strategic acquisition criteria, maybe it’s time to add an acquisition deal modifier to the plan.

There’s nothing wrong with evolving the plan design to cover exceptions, just make sure it’s done through the plan design process versus making discretionary deals.

Finance Should Lead Compensation Governance 

Most sales organizations rely on Finance to set up and maintain commission plans within compensation systems. Finance should own compensation governance because they have a vested interest in the accuracy of commission expenses.

But merely setting up commission plans doesn’t mean Finance should dictate commission plan policies. Collectively with Sales leaders and Revenue Ops, Finance should define compensation program policies, perform regular plan audits, and escalate when exceptions exceed established thresholds.

Exceptions are natural part of running a compensation plan. It’s how you manage them that matters. 

Conclusion 

Deal-level commission plan exceptions may feel like harmless one-time decisions, but they:

1.Reduce plan predictability
2.Impact selling behavior
3.Require manual handling
4.Create bad data
5.Cause contention between Finance, Sales, and Revenue Ops

Compensation programs are strategic assets that align sales teams to corporate objectives. Treating them as such will save you money and protect plan integrity long term.