- Blog post
Formulating a Sales Compensation Plan
Break down your sales compensation plan into a simple formula
When you boil your sales compensation plan down to payout formula, it’s the plan and it has a lot to say about how motivated your sales people are. And there are many variations on this theme but the example of this page shows the common type of formula for what I call sales producer type individuals. And that’s where again, where quotas and target incentive awards are used.
Again, you’ll notice several dimensions to this formula. The first one at the bottom is called the threshold. This is a point at which a minimum level of performance is required to achieve payment under the plan. I set it at 79%.
Lots of organizations don’t have a threshold as part of their sales compensation plan. But the theory or the philosophy behind having a threshold is that sales people should at least generate enough sales to pay for their base salary before we start giving them more compensation. However, again, most organizations don’t have a threshold.
The second variable on this formula is the target. And essentially, we want our sales compensation plan to pay out 100% of our target incentive at 100% achievement of the target quota or sales goal.
At the top of this chart is the third variable called the maximum which is just that maximum amount that can be your no-matter-what-the-overall performance. In here, I set it at 130% of quota or above.
And lots of organizations do not have maximums in their sales compensation plan. Most sales people don’t like maximums. And no matter how high it hits, it’s a psychological thing in many respect. So – but you may even want to set a maximum on an account basis to prevent windfall situations, et cetera.
Finally, you’ll notice that the ratio of actual performance and payout relative to target incentive varies based on actual performance, meaning there’s not a one to one ratio like there is at the target rate, 100% – and incentive is paid at 100% achievement of target quota. But you’ll see that that one to one ratio varies as you move between the threshold and the maximum.
It’s using something called an accelerator and it’s used to supply additional incentives to sales people who achieve or surpass their quota and to provide them a bit more motivation to do even greater things.
Edited Remarks from “The Seven Deadly Sins of Employee Compensation Plans (and How to Fix Them)” by Rick Olivieri
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I’m having a tough time explaining to someone who does not have a sales background the rationale for providing accelerated commission percentages over quota. His feeling is, “Why change the percentage – if they sell more, they’ll make more”. Thoughts?