How to Align Incentives to Strategy: Turning Compensation into a True Revenue Control System

Organizations have gotten really good at designing incentives to drive behavior. Most have even mastered measuring ROI of spend and building technology systems to make ongoing optimization easier. But too many organizations continue to fall into the trap of optimizing incentives plans that are not aligned to their business strategy. They become very efficient at executing in the wrong direction.

Sales incentives might drive activity, bookings, revenue growth or all of the above. But if incentives are not directly linked to strategic priorities they will likely fall short on driving profitability, product adoption or long-term customer value. To fully realize the power of sales compensation, businesses must think beyond optimization and start aligning incentives to the outcomes that really matter to their strategy. When properly aligned, sales compensation moves beyond just a mechanism for paying sellers, it becomes a real-time revenue control system.

Let’s dig into how leaders can think about aligning incentives to drive profitable growth and superior seller behavior.

1. Avoiding the Optimization Trap: When Better Execution Drives the Wrong Outcome 

Think about your organization’s ultimate goal with sales compensation. More than likely you answered with “optimization.” We optimize plans every year, many organizations have entire teams dedicated to plan optimization. We analyze historical data, interview sellers, adjust payout curves and make sure we’re paying the absolute maximum dollar at quota.

There is nothing wrong with this. Optimization is good, necessary even. But without direction, it can be dangerous. An optimized plan that drives the wrong seller behavior is far worse than a plan that drives perfect behavior, but leaves dollar on the table. Take a look at this example: 

A SaaS company is focused on maximizing bookings so decides to optimize their plan to drive that behavior. To do so, they focus on refining their compensation structure. They tune accelerators and sellers across the organization are motivated to drive gross bookings throughout the quarter. Ultimately, the business has its highest quarter of revenue ever.

Great right? Exceptional execution and a clear optimization win. But look deeper at what happened. 

Discounts were up 40% leading to lower margins. Customers booked during the quarter have a lower retention rate vs historical averages. Expansion has been minimal, because reps were pushed so hard to book deals they took whatever they could get to close.

Did this company optimize their plan? Absolutely. Did they optimize for the right outcome? No. 

Optimization is about improving execution. Alignment drives impact by making sure you’re executing on the right things.

2. Start by Defining What “Good” Behavior Actually Is

Too many organizations approach sales compensation with a “one-size fits-all” mentality when it comes to revenue. All revenue is good revenue. All activities that drive incremental revenue are good activities. All sellers who drive revenue above quota are better than sellers who do not meet quota.

Reality looks a little different. Not all revenue is created equal. Not all sellers drive equally valuable outcomes for organizations. But how do you define what “good” behavior is?

Revenue sold at a large discount isn’t the same as revenue sold at contract price. A deal that churns 30 days after booking does not have the same value as a deal that expands within the first year. But many compensation plans do not reflect these differences.

Imagine two sellers who drive different types of revenue for an organization. Seller A books high volume every quarter and regularly exceeds quota. However, this seller tends to book large deals with large discounts and focuses on easy opportunities. Seller B drives slightly less revenue, but owns premium customers, has far stronger pricing discipline, and drives high retention.

How does their payout compare in a traditional revenue-only plan? Based on results, Seller A should earn a significantly higher payout than Seller B. But is that what’s best for the organization? Likely not. 

When determining what good looks like, organizations need to think beyond base revenue. Is margin important? Does the company need to grow specific products or services? Do they care about customer retention? Expansion? Each of these factors can (and should) influence how buyers are rewarded for their contributions.

By understanding what “good” looks like and how it aligns to the company’s overall strategy, leaders can influence seller behavior on an ongoing basis.

3. Turning Strategy into Action: Using Compensation as a Revenue Control System 

Great, you’ve spent time defining your company’s strategy and what good seller behavior looks like. How do you actually tie that to compensation? Here are some ideas. 

If your company values margin and profitability, ensure incentives reward profitability not just revenue. Do you have a new product launch or portfolio you need to drive adoption of? Consider building accelerators into compensation specifically for those products. If retention and customer lifetime value is important, make sure there are incentives to create that behavior. This could look like claw backs on deals that churn, renewal incentives or even multi-period performance plans.

Don’t have specifics on what you need to drive yet? That’s ok too. Many companies don’t start with fully formed strategies. What they do is align incentives with their overall company goals. It’s not pretty at first, but it does a few important things:

Leaders start looking at compensation as a tool to influence behavior and control revenue, not just a cost center that pays reps. By looking at the organization’s overall direction (even if it’s not fully defined), leadership starts identifying the types of seller behavior they need to see. Is revenue important? If so, they could put more compensation at risk on revenue metrics. Do they need sellers to focus on un-booked opportunities? Consider adding activity incentives for desired behavior. Profitability? Adjust payout structure and more. 

Continuing with our previous example, let’s say our hypothetical company realizes they actually care about profitable growth. Rather than just pumping up revenue across the board they decide to re-weight their plan to focus on profitable deals.

They change their plan to be 70% revenue, 20% strategic product mix, and 10% customer retention. What happens? Almost immediately sellers shift behavior. They focus on bigger, better deals. They position strategic products when selling. They care more about customer fit. 

This is just one example. As your organization begins to define their overall strategy and desired seller behavior, think about ways to build that into the compensation plan. Taking incentives beyond commissions and base salary allows you to use compensation as a real-time control system.

Many organizations adjust plans based on behavior throughout the year. Pipeline starts to dry up? Add a short-term accelerator to drive activity. Margins are down? Adjust payout progression to hold quota by reducing compression. New products not selling? Incentivize sellers to focus on the right products.

Using sales compensation as a control system allows you to dictate seller behavior versus watching from the sidelines. It also enables leadership to respond to changing business needs. Rather than sticking to one plan year over year, incentivization becomes fluid, adapting to the business’ priorities.

Conclusion 

Aligning incentives with strategy starts with thinking differently about what you want sellers to accomplish. Stop looking at optimization as a one-time annual exercise. Think about how to tie incentives to your overall business strategy and use compensation as a control tool.

Companies who fail to align incentives to their strategy will continue to master getting better at doing the wrong things. When compensation is aligned with what’s important to your business, everything sellers do becomes strategic. Not only will your organization optimize incentives, you’ll have a plan that requires reps to optimize behavior to reach their goals.