Given that we are entering the fourth quarter of the year for those companies that work on a calendar year basis, now is the time when some clients contact me to talk about redesigning their sales compensation systems. One of the key decisions management of businesses confront is how to best balance the following:
- motivating the sales force to close more/bigger/faster sales
- costs and payouts associated with incentive compensation
- maintaining good customer relationships (with existing customers and with prospects/new customers).
Offering Commission or Bonuses
Many employees in non-sales roles receive salaries and may be on a bonus plan based on the organization achieving objectives. Their compensation is relatively stable and predictable. However, sales people are often compensated according to different scales and standards. They often are paid according to the business they “close” (either on a straight commission, a bonus based on percentage of sales quota achieved within a time frame, or an inducement based on the type of business closed; new contract, new product, etc.).
The belief is that the opportunity for a salesperson to achieve a significant payout will generate greater effort and a higher level of success, which in turn will provide the company with higher revenues. However, some companies do not wish to leave that potential uncapped (meaning, they want to have a ceiling or a limit to how much a sales person can earn).
Reasons Given to Cap
The explanations given for considering a cap on income for a sales person are addressed in a recent article that appeared in Talent Management Magazine. In short, the most common reasons given include:
- Inability to predict or project payouts
- Difficulties in meeting production demands
- sales people out-earning managers or more senior members of the organization
Inability to Project
Ideally, the company is (and should be) responsible for meeting the payout requirements required based on the additional revenue that the sales generated. A well-designed plan would ensure that there was significant enough monies available in the sale to pay out the bonus or commission. The sales person should not be penalized for a poorly envisioned forecast or pricing strategy. The de-motivating impact of that being in place almost guarantees a sales person purposely avoiding selling beyond the point of meeting the maximum commission/bonus percentage and saving any potential additional business for a future time period.
Difficulties in Meeting Production Demands
The sales person should not be punished for the company’s inability to have production contingencies in place should a large sale or series of sales be placed. The role of the sales person is to sell. If the company does not stand behind those efforts, the impact on the sales person’s desire to sell is hampered. The sales person is not responsible for producing the product, and beyond forecasting needs or anticipated sales has no influence on the company’s ability to meet demand.
The other consideration mentioned commonly is the inequity of a subordinate out-earning a manager. A well designed compensation plan would be clear on how each position or function is compensated. In some instances, the manager receives a portion of the subordinate’s closed sales. If an entire sales region is over quota, then the manager stands to make substantial income. However, if the sales person should individually out-earn the manager based on her results alone within the region – then she is being rewarded and the manager is not deserving of the same (or higher) reward based on the manager’s role.
Putting a cap on sales income is a sure way to create feelings of resentment and disloyalty to an organization. While there are issues that need to be addressed to provide for fairness, rewarding the right behaviors and results, etc., it is not a panacea to limit income potential and expect it to be readily accepted by the sales person without resistance.