How do we design a tiered compensation plan? And why would we want one?

A tiered plan generally involves several different payout rates at different levels of achievement. Generally the rates increase as sales productivity increases so that the reward for higher levels of sales is a greater payout rate for additional sales. This serves the business by:

  • Limiting payment to those who have achieved little (perhaps not having fully covered their fixed costs)
  • Providing added motivation to encourage more sales for those in-range of accelerators
  • Paying the highest rates of compensation only to those who have contributed the most.

It is often advisable to decelerate the payout rate at a very high level of achievement. For a more complete discussion of deceleration see the post: When should payout rates decrease, and why?

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