Modifying compensation plans can be disruptive and demotivating, even if your team benefits from the changes you’re making. Generally, they will be skeptical: There will be chatter and maybe even accusations that leadership is amending the comp plan only to fatten their own wallets. Yet even with these risks, there are times change is necessary. Sometimes the existing comp structure rewards the wrong behavior. At other times, investments or margin pressure require changes, or there is a shift in company strategy which compensation needs to reflect.

Whatever the reason, here are some best practices to consider when amending your team’s pay structure.

Communicate the Why

Communicating reasons for the changes before rolling them out can go a long way in alleviating skepticism. Every modification should be linked to a clear business objective that states where you need to improve performance and why. Do we need new accounts? Do we need to incentivize a sense of urgency? Do we need to increase certain activity? Do we need to build a strong sense of team in the organization? Do we need to become more financially sustainable? Signaling these objectives early demonstrates that the modifications aren’t about buying a new boat for the owner but instead building a competitive and sustainable organization.

Keep it Simple

A common mistake I see is leaders creating overly complicated plans that try to accomplish too much. When there are too many variables, the plan loses clarity and no longer influences behavior — the whole point of variable compensation. While there’s no perfect plan, the best ones are simple with a maximum of three components. If your employees can’t write out their compensation on a napkin and easily explain it, your plan is likely overengineered.

Thorough Modeling

It’s important to model compensation’s impact on the company’s finances as well as individual producers. For the production team, I’ve seen effective plans that range from 35% to high 50% of gross profit, including salary and commission. Once comp begins to make up percentages in the low- to mid-50s, I rarely see bottom-line profitability.

This range is extensive, and each leader needs to understand their own math. For example, some firms that invest heavily in technology and marketing will need to pay their people a smaller percentage of the gross margin.

But at the same time, these firms should understand that their gross profit per producer should be above industry average. There’s no sense spending a lot on technology if it doesn’t improve the productivity of your recruiters or organization.

You should also provide modeling for how compensation impacts employees at all levels, from top producers to new employees. For existing producers, they will benefit from a working model that allows them to forecast their pay based on historical production. This allows them to maximize their future earnings based on the new plan.

Take and Give

At times, it’s necessary to reduce commission payout due to restructuring or redefinition of certain roles. One example would be if you’re creating a business development team to bring in new accounts.

Some plans pay account managers (AMs) a premium because they bring in the accounts they manage, but what if someone else brings one in? Should the AMs be paid as much? Can the company afford to pay the salary and commissions of both a business development team and an AM team? If the answer is no, the AM commission plan needs to be adjusted down to balance the cost of the development team.

To reduce the pushback from legacy AMs, they can either be offered a higher base to take some risk off the table, or they could receive an increased payout for achieving certain stretch goals.

Regardless, giving some additional compensation in some areas to balance out what’s been removed can help with objections.

While each situation is different, following certain best practices allows leaders to make the necessary adjustments while keeping their teams motivated and focused.

Proceed with compensation changes carefully, communicate with your team, don’t overly complicate, know the numbers and provide an opportunity for team members to become whole if the numbers allow. By doing so, you can minimize the disruption and ensure the best return for everyone involved.

This article appeared in the Staffing Industry Review November/December 2024 issue.  Click here to see the article on SIA’s website.