When should payout rates decrease, and why?

We generally recommend that rates decrease at a very high level of performance, well above goal. And the decrease should continue to hold the rate above the “base rate” (immediately below goal rate).

While this is not always appropriate, it should be considered when:

  1. The plans are goal-based and goal setting is “loose” so that some people achieve, for example, 200% of the goal. In this case, the high level of achievement could be due to a bad goal.
  2. The sales people sell very large deals, which could tend to make performance “lumpy.” Oftentimes these deals are closed with help from senior leadership in the company, and often also at a lower marginal profit. While it may be harder to close a $4M deal than a $2M, it’s probably not twice as hard (and it may not be worth twice as much to the company).
  3. The company has a history of capped plans. Deceleration is always much preferable to caps.

The other philosophical principle here is that you want to put as much money as you can right above goal so that the reward for getting to and beyond goal is the opportunity to live on a wonderfully accelerated slope. In fact, it’s great to put so much money there that the company would not choose to afford it indefinitely. So when you do decelerate, the rate is still quite attractive. This will serve to pull your OK performers up and over goal without causing an unaffordable high cost of comp.