Profit First Incentive Design: Why Revenue-Only Quotas Are Dangerous

Sales compensation plans have been historically built around one key driver which is revenue.

If you met quota, you get your commission.

If you beat quota, accelerators were applied and commissions got bigger.

This worked fine when margins were consistent, pricing power existed, and product portfolios were less robust.

Unfortunately, revenue trends have changed. 

Organizations are seeing more pricing pressure, higher customer acquisition costs, complex product bundles, and new competition.

Revenue growth is no longer a proxy for profitable growth.

However, many incentive plans only reward sellers for generating revenue.

That’s why many organizations are moving towards profit-first incentive design.

Danger of Revenue Only Quotas 

If your compensation plan only rewards revenue, your sellers will only be motivated to drive revenue.

This creates behavior such as… 

1.Massive discounting to secure deals
2. Pushing low-margin products over strategic products
3. Focusing on big contracts that may not be profitable
4.Neglecting multi-year value 

Sellers aren’t the problem. They are simply optimizing for the incentives placed in front of them.

Here’s a simple example. 

Let’s say you have two account executives who both generate $1 million of revenue per year.

• Rep A sells premium products with little to no discounting and margins are 40%.

• Rep B secures deals through heavy discounting and margins are only 10%.

How much commission does each representative earn under a traditional plan?

Both reps earn the same amount. 

Sure, Rep A brought in twice as much revenue.

But more importantly, Rep A created FOUR times the profit.

Why does your traditional compensation plan only reward revenue?

Revenue Growth vs Profit Destruction 

The issue with revenue-only quotas becomes very clear when you look at the impact across your entire organization.

Imagine a SaaS company that is in a hyper competitive market.

To drive growth, leadership increases sales quotas by 15% and applies aggressive accelerators for hitting revenue milestones.

Sales loves this. 

Quotas are easier to hit with accelerators, deals are closed, revenue goes up, and attainment looks great.

1.What does finance see?
2.Average discount rates are up
3. Customer lifetime value is down
4. Cost of sales is increasing
5. Margins are getting clobbered 

At first glance, everyone is celebrating growing revenue.

But looks can be deceiving. 

Your incentive plan encouraged sellers to churn through deals without considering profitability.

Without proper guardrails, even well intentioned revenue incentives can destroy profitability.

Enter Profit First Incentive Design 

Organizations are combating the issues of revenue-only quotas through profit-first incentive design.

Instead of purely rewarding sellers on revenue metrics, companies should tie sales rewards to revenue AND margin.

Here are a few common techniques: 

1.Margin-Weighted Quotas
2. Sales quotas are typically measured by revenue attainment.

When looking at profit first designs, organizations should think about weighting their quotas by margin.

Look at the two deals above. 

If quotas were margin-weighted, Rep A would have a much healthier year compared to Rep B.

This gives sellers guidance on which products will move them towards quota attainment.

Discount Guardrails 

Discount guardrails are another common way to build profitability into your plan.

Implementing payout decreases after deals hit a certain discount threshold ensures your reps have flexibility to negotiate with customers while still protecting your pricing.

Product Profitability Multipliers 

Bonus structures are a great way to drive seller behaviour towards strategic products.

Companies will typically pay higher commissions on certain products.

Let’s go back to our SaaS example. 

A SaaS company will typically have higher commission rates for its enterprise product versus its entry level product.

When structuring commission plans like this, reps will naturally drive more sales toward higher margin products.

Profitability Accelerators 

Similar to discount guardrails, you can set up your accelerators to pay out based on profitability.

An account executive would receive normal accelerators if they met their quota.

But if that deal also hit a profitability target, that seller would be eligible for a bigger payout.

Platforms to Enable Profit-First Incentives 

To make any of these profit-first incentive designs possible, you’ll need a tool that allows you to build compensation plans with margin in mind.

Sales performance management platforms make it easy to build robust plans with margin metrics, discount controls, and product weighting.

With technology like this, Revenue Ops teams can stress test payout scenarios to ensure plans won’t negatively impact profitability.

Now that you have the tools to build and test plans, it’s time to balance revenue growth and profitability.

Achieving Revenue Growth AND Profitability 

Prioritizing profitability does not mean you have to give up on revenue growth.

Profit-first means you want to grow revenue while maintaining healthy profit margins.

There are three goals we want to achieve when thinking about profit-first incentive design.

1.Motivated sellers
2. Predictable revenue growth
3. Healthy profit margins 

When these three factors are aligned, your compensation plan becomes a strategic tool.

A shift to Profit-Based Sales Compensation 

Revenue-only quotas are on their way out. 

As competition heats up, your organization cannot afford to incentivize deals that hurt your bottom line.

Incentive plans need to evolve to reward sellers for driving profitable revenue.

By implementing margin signals, discount guardrails, and profitability accelerators, your organization can design a compensation plan that drives behaviour towards deals that will truly move the business forward.

Profit first is the future of sales compensation.