Tag Archives: Plan mechanics

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?

How should we build a payout table for very small goals, or goals that could go negative?

This one is tricky since the usual percent of goal type payout table just doesn’t work in these situations. For example, if a small business had a business plan that included an operating loss of $200,000 for the year, putting together a payout table to reward for this “success” would not work if the mechanics were communicated as a percent of the goal, which might be restated as

Goal: Operating Income = -$200,000

To build the payout table, we’ll need threshold and excellence performance levels, a target payout, and a leverage factor.

Threshold = -$400,000

The Threshold is the level of performance below which no payout is earned. Usually the goal is aligned with the annual operating plan. No payout at all below goal means goal setting precision must be very high. A modest payout as goal is approached is often a better design.

Excellence = $0 (breakeven)

In this case where a loss is expected, it may be the case that breakeven would be a fabulous result for the coming year. If so, a handsome reward could be delivered at that point.

Target Incentive = $10,000

Someone reading this is thinking that it’s hard to pay an incentive to reward someone to deliver a loss. And clearly this is not a sustainable business model for the long run. But in come-back situations, or years of investment, it may be a great idea to have those who influence the outcome with compensation at risk, along with upside, for delivering against the annual operating plan.

Remember that we’re talking about sales compensation here, so the assumption is that the incentive pay is true at-risk pay, not over-and-above pay. The person with this incentive opportunity has put some portion of their market value at risk with the expectation that they do influence the outcome materially, and that when they do a great job they could earn back all that they have put at risk, and then some.

So what does the payout table look like? Here’s a sample:

Annual Operating Income Payout
Better than break-even (positive OI) $20,000
$100,00 loss to break-even $15,000
$200,000 loss to $99,999 loss $10,000
$300,000 loss to $199,999 loss $5,000
$400,000 loss or worse $0

 

 

 

 

 

When two or more people work a sale, how should credit be shared?

Especially for large or complex sales, it often takes more than one person from the sales team to close the deal. If the two people are in different roles, for example the Account Executive responsible for the account and the Product Specialist responsible for sales of the key product, then both would usually receive full credit. If, however, two different Account Executives work together to close a deal, it may be appropriate to split the credit between them. The basic options are detailed below.

Double quota/double credit

Description: Each participant in a sale receives full quota and full credit for the sale (or “their” piece, e.g. Product Specialists take only their product slice)

Advantages:

  • Strong encouragement for participation of multiple sellers in an opportunity
  • Clear message regarding expectations communicated via quotas

Disadvantages:

  • Difficult to model selling costs in relation to sales productivity
  • Special care must be taken to ensure the team size is appropriate for the opportunity

Appropriate use:

  • When it is possible to anticipate the requirement for participation of each team member in a certain class of selling opportunities
  • When teaming is essential to the execution of the sales process

Credit splits

Description: Credit for all sales is divided among participating team members, with total credit adding to 100% of actual sale value

Advantages:

  • Easy to model and anticipate selling costs in relation to results
  • Opportunities will tend to be handled by the smallest effective team

Disadvantages:

  • Disincentive to team with others due to anticipated reduction in sales credit
  • Expectations regarding degree of teaming are not communicated via quotas

Appropriate use:

  • When it is important to be able to assign a team to an opportunity “on the fly”
  • When it is difficult to anticipate the teaming required, and therefore to set quota

There are ample variations on both of these types of incentive, including

  • “Layered quota / layered credit” in which more than two people are involved in a sale (e.g., Account Manager, Product Specialist, and Channel Manager)
  • Split credit with more than 100% of total sales being distributed (e.g., allow up to 200% credit, but with no more than 100% going to any one person/role)

Most complex sale requiring involvement of multiple sales people in most deals benefit from some form of shared sales credit. The appropriate form will depend on the intended coverage model and key accountabilities of each sales role. While the CFO will be concerned about “double paying” when several people receive sales credit and compensation for one sale, these concerns are generally allayed through rigorous modeling of the total cost of the selling function as it relates to overall sales productivity.