Why Most Sales Compensation Plans Fail by Q2 And How RevOps Knows Early

Sales organizations spend months crafting their sales compensation plans each year. Executives brainstorm quotas, commissions, accelerators, and business goals to ensure reps’ behaviors align with the company’s strategy.

It looks great on paper. 

But by Q2 things start to go sideways. Leaders notice increase compensation exceptions, margins shrinking, unpredicted spikes in payouts, and angry reps who don’t understand why they’re not getting paid what they think they should be.

Plans don’t necessarily fail by design, but rather by Q2. And RevOps teams can usually know about these problems way before year-end.

Let’s explore how Revenue Operations (RevOps) can catch these issues early and prevent sales incentives from drifting away from your revenue strategy.

Why Compensation Plans Can Start to Fail So Quickly

Sales compensation plans are often viewed as an annual planning topic. But the revenue landscape shifts much faster than annual cycles.

From new products launching to discounting behavior changing, there are many factors that can impact plan performance:

1. Launch of new products or services
2. Changes to pricing, discounting, or deal sizes
3. Territory or organizational changes
4. Increase in Enterprise deal sizes
5.Shifts in sales behavior to game the plan

Any one of these factors can create gaps in the compensation plan design. And without constant visibility, companies won’t realize these issues until financial damage has already been done.

Revenue Operations needs to start viewing compensation plans as “systems” that require continuous monitoring and governance.

Signal #1: Quota Attainment distorted

This is perhaps one of the first signs that your compensation plan is heading south.

In a normal sales organization, your quota attainment should look something like this:

1. TOP PERFORMANCE: Above Quota
2.MOST REPS: Near or At Quota
3. LOW PERFORMANCE: Below Quota 

If you start to see large shifts in this distribution, your compensation plan may not be working as designed.

Imagine if you notice that 60% of your reps are above quota by the end of Q2. Your quotas may have been set too low causing everyone to hit their accelerators and driving up comp expense.

Conversely, what if you notice that less than 20% of reps are hitting quota halfway through the year?

This could indicate your plan is not realistic and demotivating your reps.

Signal #2: Commission-to-Revenue Ratios Start to Trend Up 

Sales leaders aren’t the only ones who care about quota attainment.

Finance teams keep a close eye on the commission-to-revenue ratio since it directly impacts COGS.

If you start to see this ratio trending up significantly by Q2, chances are your plan mechanics are failing to keep up with selling conditions.

Let’s say you’re a technology company who budgets for a commission-to-revenue ratio of 8-9%. If you find your ratio trending towards 12% midway through the year, the reason could be due to:

1. Increased discounting activity
2. Too many reps hitting multiple accelerators
3. Large enterprise deals closing and maxing out payouts

Great RevOps teams will surface these trends to leadership early so they can course correct before commissions eat into profitability.

Signal #3: Overrides and Exceptions Grow 

If your plan doesn’t fit the deals that your reps are closing, leaders will start to see increases in overrides.

These could come in many forms such as:

1. Special payouts for large deals your reps are closing
2. Discretionary accelerators being approved
3. Reps asking for quota changes after the fact

Occasional overrides are normal but if leadership constantly has to approve exceptions to your plan, there could be holes in your plan design.

For example, if your company closes a lot of Enterprise deals and they frequently span multiple years, but your commission plan only recognizes revenue the first year. Leaders may start to see large commissions being approved “after the fact”.

Take a look at your override frequency. Are there any trends that RevOps should know about? Left unchecked, leaders will quickly loose trust in your compensation plan.

Signal #4: Margin Starts to Slip 

Here’s another Q2 red flag. Companies often create incentives around closing deals without considering margin.

If your reps are getting paid the same commission on $10,000 deals as they are on $1,000,000 deals, regardless of discounting, there’s a high likelihood they will chase the largest deals possible.

Imagine your company’s average gross margin dips from 65% to 54% in a single quarter. If commission payouts are strictly based on revenue booked, your plan may be driving this behavior.

Consider building in margin tiers for commissions to keep reps selling responsibly.

Sales Compensation platforms make it easy for RevOps to track these metrics in near real time.

Signal #5: Average Deal Size Concentration Shifts 

Incentive plans are often built around average deal size.

However, if you begin to see a few large deals begin to close (typically enterprise contracts) your acceleration tiers may begin triggering giant commissions.

For example, your sales compensation plan may have been designed with an average deal size of $50,000. But what happens when you start closing a few $1 million deals in the first half of the year?

A sudden influx of large deals can destroy your compensation plan.

Revenue Operations leaders should keep an eye on deal size concentration. Are your incentive payouts still financially sustainable? 

How RevOps Can Identify Warning Signs Ahead of Time

The best way to prevent your compensation plan from failing is to maintain constant observability.

RevOps shouldn’t wait until year-end to review sales comp trends. Quarterly isn’t frequent enough. 

Metrics like quota attainment, % revenue paid in commissions, override frequency, and margin performance should be monitored monthly.

With proper visibility into these key signals, RevOps can spot trends early and raise a flag to leadership before it’s too late.

For instance, if quota attainment is too high at the end of Q1, you may decide to increase quotas for next year. If margin begins to drop, you can modify commission plans to drive marginally based payouts.

Sales compensation plans are living systems. 

As long as your incentives are aligned with your sales strategy, they will continue to drive predictable revenue growth. But when selling behavior starts to shift  for any reason your compensation plan can begin to churn out unintended consequences.

By building continuous visibility into key performance metrics, Revenue Operations leaders can detect issues by Q2 rather than wait until it’s too late.