Sales compensation problems arise when reps either fail to make the number early in the year, or they fly out of the gates and coast the rest of way. This can negatively impact both selling expense and rep performance by causing you to potentially overpay for unbalanced results.
While quarterly commissions focus on production of a singular quarter, a 5th quarter commission adds emphasis to the annual result. Here’s how it works:
The “Standard” example on the left shows a “standard” commission plan that is distributed equally across four quarters. The rep has a goal so sell $1M, or $250K per quarter. If your plan looks at quarters individually, a rep who gets off to a slow start loses out on 50% of his or her annual commission. They give up. Conversely, someone who flies out of the gates may earn a huge commission check in the first half of the year and start sandbagging for next year.
The “1/5ths” example on the right takes a 1/5ths approach. In this scenario, the rep can earn 80% of their annual variable compensation through results in the four quarters. The remaining 20% is reserved for “Q5,” or hitting the annual goal. In other words, if the rep misses out on any particular quarter during the year, but manages to hit the total quota, there is 1/5 of the variable paid at year-end.
The 1/5ths approach provides several benefits:
- Balances selling expense by paying for both quarterly and annual performance
- Keeps sales reps engaged by creating two ways to earn commissions
- Incents the desired performance of your sales force
Even though your team won’t get a 5th quarter to try and win the Super Bowl on Sunday, give your sales force a shot at victory in 2012 with a 1/5ths sales compensation plan.