Comp Plan Pays for Term Paper, Not Cash: 11.4% Cost of Revenue
Veltrix pays enterprise account executives 10% of first-year ACV and 4% of year-two ACV, with nothing on renewals. Customer success managers carry a flat 90/10 base-to-variable split. The company moved to annual prepayment and three-year contracts, and 42% of last year's new bookings were multi-year. Expansion is now 34% of total bookings but earns an AE no credit unless it is a new-logo add-on inside the first 12 months; CSMs earn 1% on expansion. The observed result: AEs push 20% year-one discounts with 8% escalators to inflate total contract value, renewals land at 88% of prior ACV with heavy down-sell, and CSMs hand expansion leads to AEs to own the deal. Sales operations reports plan cost at 11.4% of revenue against a 9% target. There are 62 AEs, and the plan year is five months old.
1. Identify the behaviors the current plan pays for, then redesign crediting for multi-year, prepaid, and expansion revenue.
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The plan pays for exactly the behavior you are seeing.
- 10% on year one and 4% on year two pays for term optics, not cash. A rep who discounts 20% in year one and adds an 8% escalator maximizes credited value while reducing cash collected and raising renewal risk. The 88% renewal ACV is that bill arriving.
- No expansion credit until month 12 means the AE's rational move is to wait or re-paper the deal, and CSMs passing leads to AEs is the same incentive seen from the other side.
- A flat 90/10 CSM plan leaves retention and expansion both unpaid, so both get whatever attention is left.
- 11.4% of revenue against 9% is the price of all of it.
Redesign:
- Credit multi-year at ACV with a term factor capped around 1.15x for three years, and only for booked, non-contingent value. Unbooked escalators earn nothing until invoiced.
- Add a prepayment accelerator of roughly 2 points, and calculate credit on net revenue rather than list so discounting is self-penalizing.
- Pay expansion to the account owner, splitting AE and CSM 60/40, with the split set by who sourced it. Pay renewals at a smaller rate to the CSM rather than zero.
- Hold 20% of commission for 12 months against early churn on that specific deal.
Model the cost before launch; prepay and expansion credit should be self-funding against the 9% target.
2. It is month five. What do you do about changing the plan mid-year, and how do you handle deals already discounted under the old rules?
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Mid-year change is legitimate when the plan pays for the wrong thing. How you do it determines whether you lose your best people.
Principles:
- Never retroactively reprice closed deals. Deals signed under the old plan are paid under the old plan. Retroactivity destroys trust and, given written-plan requirements in several US states and many countries, creates real legal exposure.
- Set an effective date forward, in writing, with signed acknowledgment. Involve counsel; plan documents should already reserve the right to modify prospectively.
- For deals already in commit or late stage, offer a choice: old-plan treatment if closed within 30 days, new plan thereafter. That removes the incentive to sandbag into the old rules.
- Protect the honest middle. If quotas were set against the old plan, adjust quota or add a one-quarter transition guarantee so the change does not read as a pay cut for average performers.
- Handle deliberate gaming separately. The 20% discount with 8% escalator pattern is a conduct issue as much as a design issue. Review the top offenders' deals individually and, if the discount was misrepresented internally, manage it as performance, not as a plan-document change.
Communicate in one session with the data: what the plan cost, what it rewarded, what changes, and what does not.
3. How do you test within two quarters whether the new plan is producing the intended behavior?
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Measure behavior change, not just cost.
Behavior:
- Average discount depth on new business, target down 5 or more points, and the share of deals above 20%.
- Term and prepay mix: three-year share should hold or rise while average discount falls, and prepay share of bookings should climb.
- Renewal ACV retention, targeting 95% plus against the current 88%, and down-sell rate.
- Expansion sourced or co-sourced by CSMs, and time from signal to expansion quote.
- Quarter-end concentration, meaning the share of bookings in the final five days. Above 50% suggests reps are still gaming the cadence.
Economics:
- Compensation cost as a percentage of revenue, monthly, against the 9% target.
- Earnings by performance band across top, middle, and bottom. If top performers earn less while cost of revenue stays high, the plan is misallocated.
- Twelve-month churn on deals closed under the new plan, which is the clawback trigger.
Governance: review at 30, 60, and 90 days with sales operations and finance, publish a one-page scorecard to managers, and pre-commit to what you would change if discount depth has not moved by day 90. Without that, the plan gets judged on anecdotes from the loudest rep.