The debate around the use of thresholds is perennial and it’s fair to say that it’s one of the areas of sales comp where common practice varies a fair amount.
The argument in favor of a threshold goes something like this – “why would I pay a salesperson to underachieve? We’ll create a minimum level of performance and if they don’t reach it, they won’t get anything”.
But let’s consider the impact on mechanics. Assuming the plan pays out monthly or quarterly, having a threshold means one of two things; an annual threshold where the rep doesn’t earn until the threshold is reached; or a quarterly or annual threshold so as to enable regular payment.
The flaws of the first option are clear but in the second case we have to consider that more elaborate mechanics are required to reduce the opportunity for gaming and over-payment, and one commonly sees temporary caps combined with year-to-date approaches, and annual reconciliations in an attempt to bring the payouts in line with annual performance. Allowing for regular payments in respect of annual performance in a threshold environment will also often result in the dreaded “claw-back” clause.
All of these issues serve to fuel one of the most common ailments of the sales plan – complexity.
So let’s consider a first dollar commission-based plan…
The first benefit is simplicity. A salesperson knows exactly what they will earn with each deal they sell. The sooner they hit their quota, the sooner they can earn accelerated rates and everybody wins with a minimum of fuss.
But let’s also consider that the sales plan is perhaps the strongest tool of engagement among sales people. Is paying out on the first dollar paying for under performance, or does it keep strong salespeople motivated with every sale to reach their targets? Why should good sales people be punished to allow for the under-performing minority?
I would also argue that if you have people failing to hit quota on a regular basis, then you have a far bigger problem than paying out commissions. Either you have a poorly set quota that is unattainable to anyone – in which case you need to address your quota setting methodology and not the plan – or you have a low performer allocated to a territory that a good sales person could be making a lot more out of – who cares if it is costing $50k in commissions when it could be costing hundreds of thousands in lost sales?
I’ll leave you with the words of Dr Strangelove:
Deterrence is the art of producing in the mind of the enemy… the FEAR to attack