A moderately wise man once told me that there are only two drivers of performance – fear and greed.
If that is true then it is certainly the former that gives rise to capped sales incentive programs. For something that is so frequently cited as a negative, it is remarkable how often this mechanic crops up.
When thinking about removing the cap, there are a number of measures and considerations that can help to make this a viable option:
- Windfall provisions
- Decelerated pay-out curves
- Longer performance periods
- Performance measures
A windfall provision can be thought of as guarding against any deal that is too large to be accommodated in the incentive plan and often takes the form of a cap on quota credit for any single deal.
This is good practice to include in the provisions of any incentive plan and sends the message that while total earnings may be uncapped, we don’t want people to overachieve through serendipity.
Decelerated pay-out curves
This often appears counter-intuitive at first glance – why would we pay less for a deal to a rep that has over achieved, compared with a rep that is performing at target.
That is a valid point but often the rationale for the deceleration is to ensure that we don’t need a cap. The message to the sales rep is – this is an uncapped plan. We can’t afford to keep paying you at an accelerated rate but we certainly want to keep paying you.
Longer performance periods
The shorter the performance period, the smaller the quota, the smaller the quota, the more sensitive that quota is to over/under performance. This, among other reasons, is why “quarterizing” plans, that is to say discrete quarterly performance periods, is often a challenge.
An annual performance period means more time for the peaks and troughs of sales to even themselves out, lessening the risk associated with uncapped plans.
It is important to consider the metrics that are being measured against when calculating pay in order to understand the compensation cost of sales relationship at different performance levels.
With a financial quota, it is relatively easy to model the financial return of the incentive plan. At any given level of financial performance we can tell what the incentive cost is and justify the financial viability of an uncapped plan with a compensation cost of sales figure.
This gets more complicated when other components are introduced, for example unit sales. Unit sales are agnostic to product value and financial performance so could result in opportunities for gaming through discounting or promotional techniques that distort the relationship between financial performance and incentives.
Finally, we have to take all these factors into account when modeling proposed plans. At both the rep level, and aggregate level, we need to be able to demonstrate that the proposed mechanics create plans that are financially sustainable, even at the extremes of performance.
A cap is an easy fix but an uncapped plan sends a powerful message to the sales force and potential candidates that we are a company that backs its sales people. Fortunately there are ways to do this without getting ourselves into another nice mess.