Comp Plan That Rewards the Wrong Behavior
A medical-device distributor pays reps 100% commission on new-unit sales with no component for service contracts or renewals. Service contracts carry 45% margin and renew at 85%, while new units carry 20% margin and are increasingly price-competitive. Reps ignore the installed base: only 30% of eligible customers are on service contracts, and renewal conversations happen late or not at all. Meanwhile, a competitor is poaching accounts by bundling service at renewal. Leadership wants to grow service-contract attach rate from 30% to 60% in 18 months without cutting new-unit commissions, because new-unit volume still drives market share. The sales manager must redesign incentives within a flat total-comp budget.
1. Explain why the current plan produces the observed behavior and what the economics say about the redesign priority.
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The plan pays for new units only, so reps rationally optimize for the activity that pays them. Service contracts are invisible in the comp formula despite carrying more than double the margin (45% vs 20%) and 85% renewal - annuity revenue the rep has no incentive to protect. Late renewal conversations are a predictable consequence: no payout depends on them. The competitor poaching at renewal is the cost of that neglect.
Economically, the firm is sitting on an under-monetized installed base: only 30% attach means 70% of eligible customers generate zero service margin. Given the margin gap, each service dollar is worth more than a new-unit dollar, and renewals are far cheaper to win than new logos. The redesign priority is to shift some at-risk compensation toward service attach and renewal while preserving new-unit volume, within a flat budget.
2. Propose a compensation redesign within the flat budget that lifts attach rate without killing new-unit sales.
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Because the budget is flat, the fix is reallocation, not addition: shift a portion of the new-unit commission rate into service/renewal pay.
- Attach bonus per contract. Pay a per-contract bonus for every service contract attached to a new unit, sized so a rep earns roughly the margin-equivalent of a unit sale for attaching service. This makes attach a paid event.
- Renewal commission. Pay a smaller commission on renewed service contracts, creating an annuity incentive and protecting the installed base from the bundling competitor.
- Install-base campaign incentive. For the 70% unattached base, run an 18-month SPIFF on converted contracts, weighted toward high-value accounts.
- Protect new-unit volume. Keep the base new-unit rate largely intact; fund the new components by trimming the marginal rate on the highest-volume, lowest-margin unit deals rather than the whole rate.
- Measure attach rate as a scorecard metric and review monthly; adjust weights if attach climbs without unit erosion.
Guardrails: cap total payout risk, model the comp cost against expected service margin, and pilot before full rollout.