Activity vs. Outcome-Based Variable Compensation Plans

It's an age-old question: What's the best way to motivate your employees? While many companies use compensation as an incentive for their sales teams, no two compensation plans are alike. Which one works best? Most organizations select one of two popular models: activity-based or outcome-based compensation. There are pros and cons to each, so which one should you choose to drive sales performance with your team? Check out the benefits and drawbacks of each.

Activity-based plans: Building long-term customer relationships

An activity-based compensation plan takes a long-term approach to sales. It tracks sales efforts in incremental steps — including client calls, sales meetings, and other customer interactions. This compensation plan rewards the sales rep for each step as it’s completed, emphasizing everyday practices that — taken together — should bring in a sale.

First, let's look at the benefits. An activity-based plan takes a lower-pressure approach to sales, leaving your team members less focused on getting a sale and more on building customer relationships. Removing the pressure to immediately close a deal gives your sales reps time to nurture the deeper connections that foster customer trust and loyalty. The activity-based plan also allows reps to take a more team-oriented approach to sales, focusing less on competition and more on process. This lends itself to better workplace relationships and a more cohesive company culture.

Now for the drawbacks: Critics of the activity-based model say it draws on the wrong metrics, including some that can be easily "gamed." With your sales team concentrating on mundane routine tasks, they could be missing the forest for the trees. The point of sales activity is, after all, to achieve an ultimate result: closing a sale. In this case, the company bears the financial burden of all that sales “activity” without any guarantee of a return on investment.

Outcome-based plans: Zeroing in on the bottom line

An outcome-based compensation plan is self-explanatory. It rewards the desired outcome — a sale — rather than ticked items on an activity checklist. Outcome-based plans don’t count the steps; they are all about the bottom line. Sales reps are only compensated when a deal is signed, sealed, and delivered, so they will — in theory — push harder for a positive outcome. As you can imagine, this compensation model has several pros and cons of its own.

Let’s start with the benefits. For starters, outcome-based approaches require less data tracking, since the only important metric is the value of the final sale. It also removes company risk and places it squarely on employees' shoulders. If a salesperson fails to close a deal, they lose out on compensation. This model also requires less hands-on management because employees are expected to monitor their own progress and account for their results. An outcome-based plan also encourages competition between sales reps — and a little healthy competition boosts overall productivity.

And then there are the drawbacks. Left unchecked, an outcome-based compensation plan can create a “close at any cost” sales mentality and lead to some questionable business practices. When competition is fierce, a sales rep is more focused on winning than achieving beneficial outcomes for the company and its customers. This attitude may close more deals in the short term, but it’s not conducive to long-term customer relationships and will ultimately have a negative impact on your brand. Additionally, the outcome-based model creates a potentially toxic work environment and a fractured sales team.

Mixing the models: Meeting somewhere in the middle

To avoid extremes with either of the two main compensation models, many companies opt for a middle ground approach. A mixed plan adopts components from both activity- and outcome-based approaches in hopes of striking a balance between them. A company may assign activity-based compensation plans to their junior salespeople and use an outcome-based plan with their more seasoned sales reps. But whatever the mix, there is no “one-size-fits-all” approach. To find out which model works best for your company, or which components of each plan make up your ideal mix, consider your company goals and how each member of your sales team is best motivated.