Tag Archives: Plan provisions

If we have a reduction in force, do we pay terminated employees their variable pay?

Question

Our plan document is clear that no payment is due an employee who is not active at the time the payment is made. We pay quarterly, and will have a reduction  in force before the next payout it due. Do we pay the terminated employees?

Answer

It’s important to think carefully about the message you’re sending to your other sales people, other employees, investors, and prospective future sales people. A couple of case examples:

  1. If the sales person did a great job and their territory imploded and just no longer needs coverage (customer merged with another, competitor moved headquarters there), and if the payment due is modest, then I’d say pay it.
  2. If the sales person is the beneficiary of a dramatic windfall and has had attitude problems and is not a great favorite of their peers, then perhaps you don’t pay (or pay a significantly reduced amount).

If the company is in big trouble, then it would be inappropriate to pay employees handsome commissions that might not be necessary if it further risks your ability to survive, continue to provide employment for those remaining, and support your customer base. On the other hand, if the company can afford the payments and the good will seems worth it, then you should probably pay. Your remaining sales people will watch this carefully, and those with other options will be thinking about those options. How you treat this departing cadre could have a real effect on who you manage to retain into the likely difficult coming months and years.

Keep in mind the fact that you have more options than just to pay or not to pay.

Also keep in mind the fact that your only choices aren’t to pay or not to pay. You could pay a reduced amount (e.g., 50%) to the terminated employees; you could create a sliding scale based on tenure and pay the full amount to those in the role for 5 years or more, 75% to those with 2- 4 years of service in the role, 50% to those with 1 year of service in the role, and nothing to those in the role less than a year (for example). If you need a policy to be consistent across a number of people, consider making a list of all the affected people and making a quick note of what seems fair to each, then “zoom out” and see if you can see a pattern that you could turn into a policy.

And finally consult your legal counsel. There are laws that govern this in several jurisdictions, so you may or may not have as much choice as you’d like, depending on how your plan document is written and what laws apply.

Has your company encountered this challenge? How did you handle it?

Should sales representatives receive incentive compensation payments while on a leave of absence?

When considering the appropriate treatment of incentive compensation payments during a leave of absence, we think about what is fair based on what the sales person is actually being paid for in a given performance period. Are payments that would normally be made during the leave period related to work performed prior to the start of the leave? Or do those payments relate to work that would have been typically been performed during the leave? The following examples illustrate these two cases:

  • The incentive plan pays “now” for work completed “before” – A sales person works for months to craft a deal. The deal closes a week after the sales person begins a leave of absence. The sales person completed most if not all of the work to close the deal prior to the start of the leave. We would expect the sales person to be paid an incentive for this deal. Whether the incentive paid is 100% of the calculated incentive or a prorated amount would most likely depend on who else was involved in closing the deal and what role they played. Bottom line, the sales results may have come to fruition during the sales person’s leave of absence, but they were driven by significant work completed before the leave began.
  • The incentive plan pays “now” for work completed “now” – A sales person has ongoing responsibility for a group of accounts within a geographical territory. The sales person calls on accounts regularly and maintains ongoing relationships that drive a flow of business. For every month, the sales person is paid an incentive based on the aggregate performance of the accounts in their territory vs. an assigned goal (perhaps a revenue goal). If the sales person begins a leave of absence in the middle of a month, we would expect the sales person to be paid a prorated incentive based on the number of days of active work during the month. Most likely a manager or peer is covering the territory while the sales person is on leave. The “covering rep” may or may not be receiving additional compensation for their effort.

Of course, the above are only general guidelines and not legal advice. Talk to your legal adviser to evaluate any proposed approach in light of applicable laws. Some countries outside the US, as well as some states in the US (California and New York come immediately to mind), have very specific guidelines about incentive payments. These guidelines often vary based on the type of incentive and the amount of pay at risk.

Why would I pay incentives to sales reps when the overall company is not hitting its goals?

Incentive compensation for sales reps is not like annual bonuses for the regular staff. Often it can make up 25%, 50% or even 100% of the reps’ entire pay. Just as you wouldn’t withhold salary from your employees because company performance is below target, nor should you withhold incentive pay from your sales reps if they earned it based on the formulas provided in their plan document. If you are having a bad month and don’t pay your sales reps their earned incentive, then one thing I can guarantee you is that your next month is NOT going to be any better.