In a recent post, I wrote about the difference between commissions and bonuses. Today’s discussion focuses on how to approach a commission-based plan to reward your best people.
As 2011 concludes, we are working with a number of our clients to redesign their sales incentive plans for next year. What we’ve found is that companies often pay commissions too early, resulting in overpayment to ‘C’ players. This exhausts the variable sales compensation budget and leaves little for top performers. If you lose your best reps because they can make more money elsewhere, you can kiss next year’s goal goodbye.
Take the two examples below. Each rep has a $100K base, $100K incentive and $1M target: A 20% cost of revenue (CoR) at plan. Look more closely at the yellow shaded boxes.
In figure 1, the first $500K in annual revenue costs the company 30%, including salary. If that individual fails to perform beyond 50% of the goal, the company is saddled with a high cost of sales for below average performance. Not to mention, the rep made $150K for batting below average. Want to keep your ‘C’ players happy? Mission accomplished.
Now look at figure 2. Here, the rep has to meet at least 50% of the annual quota before earning commissions. This cuts the cost of sales down to 20% for salary only.
The impact? The company now has $50K in variable compensation to allocate towards top performers.
If you turn your attention to the payouts for 150% quota attainment, you will see the top rep in figure 2 makes $325K compared with $250K in figure 1.
You may be thinking the 5% higher CoR in figure 2 disproves the model. There are 2 reasons why this is an incorrect assumption:
- By not paying your bottom performers, the overall CoR for the team will level itself out
- Paying a 1:1 commission ratio for performance above 100% in figure 1 reduces plan “excitement.” There is no incentive to sell past 100% commission if they can sandbag and start off next year with the same payout dollars
So now what?
Here’s the “net it out” action item you and your Sales Operations Manager can do immediately:
- Review every sales rep’s % to quota YTD
- Look at the incentive payout multiple between your #1 and bottom performer YTD
- Add up all the dollars you’ve paid for below 50% quota attainment
- Look at the impact of paying those dollars to your best performers
Fix your sales compensation models and turn your top performers into lifelong superstars…at your company. If you have any questions or need feedback, leave me a comment below.
Do you want to hear more about how world class companies are redesigning their sales incentive plans for next year? Consider participating in the research tour advertised below where we review case studies of sales compensation programs in action.