A difficult aspect of sales bonus systems is the incentive compensation payout curves. Commission payments are calculated using a payout curve based on performance in comparison to the objective. Concerns regarding seller roles, company costs, encouraging all sellers, controlling behaviors to realize the full potential of sellers, and minimizing unfavorable behavior must all be taken into account.
The amount of compensation for on-target sales success is specified in a scheme. What transpires below target once that point is anchored? How do you keep both high and poor performers interested? The payout curve’s further pivotal moments are as follows:
- Threshold: The minimum level of sales performance required to qualify for incentive compensation; the threshold below which there is no payout.
- The pinnacle of excellence is when vendors surpass their compensation goals.
- Cap: The maximum payout, regardless of additional sales by sellers, past which there is no more payout.
The Payout Curve: Why Is It Significant?
Organizations try to match the job and opportunity when creating a sales compensation plan. Additionally, by demonstrating an awareness of the selling environment, you must ensure that the money goes to the correct people for the proper amount of performance, based on the sales force’s effectiveness, and strive to maximize seller incentives. The relationship between territory alignment and quota setting is evident. All of this is to indicate that a wide range of variables can affect the payment curve’s shape.
A payout curve should ideally be able to differentiate based on performance. According to a commonly accepted rule, 90 percent of sellers should meet the threshold, 60 to 70 percent should reach the target, and 10 percent should reach the point of excellence for payment curves to be effective. The more aggressively you can construct your pay structure with higher thresholds and a steeper gradient after the point of excellence, the more accurate your target setting must be.
Take into account the three seller groups according to relative performance:
- The underperformers that fall short of the benchmark may be new to the position, have taken on new accounts or regions that require expansion, or simply aren’t suited for it. For this group to advance, training and motivation are required.
- Those who meet their quota but fall short of excelling are considered to be in the “mighty middle.” The trick is getting an extra 5–10% performance out of this group.
- The third category consists of high achievers who will succeed no matter the difficulty but who want motivation to continue working hard even after they have met their goal.
Each of these categories can be inspired or demotivated by the payoff curve.
What Factors Are Taken Into Account When Determining the Threshold Value?
If there is to be a threshold, what should it be set at? According to a Mercer survey conducted in the UK, 70% of plans include thresholds with a median level of 80% of the target. The main goal of the threshold is to stop this because many businesses that don’t use them discover that a significant portion of commission spending goes to underperforming sellers.
The sales role is a crucial factor to take into account when deciding on a threshold value. For an account manager position, each account will have a sales history and expected future sales based on client strategy, new goods, and upcoming contract renegotiation. So, either revenue or net sales will be reported for the current fiscal year.
A target sales amount will also be set for the upcoming fiscal year. You can estimate the number of sales that, while not guaranteed, are extremely likely if this target includes sales that are already in the pipeline or where the customer has committed to spending through a multi-year contract. You don’t want to give the seller a bonus for these sales.
Creation of your payout curve:
If the account manager wasn’t present, the majority of the sales would still occur. You need to encourage account expansion. In this case, the criterion should be set at 70% or 75% of the objective if the current portfolio represents 80% of the new FY target. The 5–10% difference acknowledges that the seller will have to put some effort into portfolio retention.
Avoid the “Leaky Bucket” situation in particular, where existing accounts are lost due to a concentration on acquiring new customers. Performance at the threshold level may only produce 50% of the intended reward. The payment curve, however, may then abruptly ramp up to the target.
Paying from Sale 1 is a preferable strategy if, on the other hand, the seller is solely focused on new logo sales and has no customer portfolio. There isn’t a specific barrier, but it’s typical to see a flatter payout curve or a higher commission rate up to a certain degree of performance compared to aim. Depending on the type of challenge in the market, this can be smaller (50 percent of target) or higher (80 percent of target). You anticipate that 90% of your hunters will succeed at this level. Once at target, the curve can ramp up.
This idea is worth revisiting at various times in the company’s growth because optimal threshold levels will vary from company to company and even throughout different seasons at the same company.
The Bottom Line
The payout curve cap is the final decision-making challenge. According to the Mercer study stated earlier, where plans contain caps, 20% of them have soft caps and 60% have hard caps, with the median cap level being 200 percent of the target.
The important consideration is risk vs. return. A cap will hinder your company’s growth efforts if you are a young business wanting to expand. Introduce a windfall provision if your pipeline is highly erratic and a large deal will result in an overpayment. With a cap, deals are often sandbagged or your top performers spend the fourth quarter playing golf. High performers should continue to strive.
A soft cap, which allows sellers to continue earning over the point of excellence at a reduced rate, is a common compromise. Some options for capping, however, do not entail capping overall revenues. Alternatives to a hard cap can include, for instance, capping quarterly payouts and “truing up” at the end of the plan year, capping particular transaction amounts, or capping specific product-related payments.
In conclusion, data must drive the creation of your payout curve. Understanding market trends and the potential for new products and services is important because history does not necessarily foretell the future. Target setting precision and pipeline predictability are vitally important. The payout curve will set the expectation and motivation for the salesforce, so choose threshold values, points of excellence, and potential caps with care.