It has become a standard in many industries that sales people are being remunerated by a mix of fix and variable salary. The latter part is often purely related to individual sales or revenue results, but sometimes also related to individually meeting personal strategic objectives. This practice is often being extended to rewarding marketing, customer success and lately even product management and R&D.

While from a point of view of managing financial risks—not needing to pay out when revenues didn’t come in or goals were not met—companies tend to embrace this, there are some important strategic drawbacks involved.

Let’s be clear: There’s absolutely nothing wrong with providing a decent additional wage to anyone, from any discipline, for extraordinary performances. Sharing parts of the success of a company stimulates employees’ involvement and increases their commitment for doing the extra mile… On top of that, upon providing ‘uncapped’ bonuses (which could theoretically increase to infinity if the incoming revenues were to boom to infinity), these employees could potentially become extremely wealthy, in line again with the success of the company. And there’s absolutely nothing wrong with that neither…

The drawback primarily lies in the ‘individual’ part and in some cases in the focus of achieving particular goals that could potentially conflict with others.

Lets start with the individual part. If people are to earn 30-40-50% of their salary on a variable part, with the potential of that uncapped part becoming 100-200-300% of their base salary, you better be sure they will do the impossible to achieve their goals. And if their goal is e.g. closing customers, they will close them whatever it takes… even if that means over-selling to the customer, somehow forcing them to buy ‘now’. But: if your business is anything else than hard-selling once, especially in SaaS/subscription environments, you don’t want unhappy customers that will churn after the first, or second payment term. You want customers for life…

Another major drawback for individual rewards, is that it promotes individualism. People will start internal politics with marketing to receive best leads, they will start fighting for major accounts or stealing deals from same account in different countries/regions, etc… and eventually the company will start losing good people.

Building further on previous example, it is easy to understand the goal conflicting part. If next to sales commissions, also customer services get additional rewarding from keeping the %-amount of churned (leaving) customers to a minimum, then a conflict arises. Sales will force-close unhappy customers, who will churn, thus denying customer service its bonuses. Or marketing will be extra rewarded on generating leads, whatever leads, sales cannot close… In any of those cases, conflicting goals and individualism kills the business.

A much better way of sharing the company’s success with each individual, is to combine achieving personal goals (e.g. 30%) with inter-disciplinary group achievements (e.g. 70%). The whole company, or a subset (geographically, product line responsibility,…), is to work towards global goals of marketing qualified leads (MQLs), sales qualified leads (SQLs), and foremost closures, revenues and churn. Everyone is encouraged to help others to achieve them, while still observing focus on own tasks at hand, and obtaining a minor personal reward for individual performances.

With each business having its particularities in terms of group and personal objectives, there’s no one-rule-fits-all on how to best define individual variable remuneration criteria’s, other than to make sure teamwork is to always win over individual performances.