A threshold is a level of performance below which no variable pay is earned. If a plan has no threshold, then earnings start with the first sale (sometimes referred to as “first dollar plans”). If there is a threshold, then some level of performance must be attained before any variable pay is earned.
The question of whether or not to have a threshold is largely philosophical, though one could make a case that there is some relation to pay mix, in that a higher base salary would pair with a (relatively) high threshold and a lower base salary would pair with a lower (or no) threshold. For plans without a threshold, it is likely that a substantial portion of the incentive that is paid from the first dollar is actually a “phantom base salary,” acting much like fixed compensation, and therefore not truly variable (or motivational).
It makes good sense to consider no-threshold plans for…
- Roles with low base pay as a percent of total compensation at target
- New business roles without any existing book of business to manage
- Roles in which compensation is calculated by transaction or deal (not aggregate results)
- Roles in which it is important for the sales person to have a clear understanding of the comp value of any proposed deal.
Is makes good sense to consider a plan with a threshold for…
- Account manager / territory manager roles with an existing book to manage
- Established/mature markets where growth is a priority
- Roles with good historical performance data enabling management to confidently set the threshold so that 90% of sales people are likely to exceed it
- Roles measured on aggregate performance measures (e.g., total sales, or total margin value) vs. deal/transaction-level measures.
Tips for picking the right threshold if you’re going to use one
If a plan does include a threshold, we generally recommend that the threshold be set so that no more than 10% of reps are performing below threshold. Some organizations tie the level of the threshold to a base salary, or the fully loaded cost of an employee to the organization (which is often a multiple of the salary in the range of 2-2.5x times to account for benefits, overhead, etc.), expecting the sales person to “fully recover” their cost before additional (incentive/variable) compensation is earned. However, this approach leaves little flexibility for times when the company needs to deploy a resource to sell a new product or service, or to build a new customer market.
While calculating the marginal cost of the next sale, or the next sales person, can yield good insights, it’s better to think about the overall cost of compensation as a system (total employee cost divided by total productivity) than at the person by person level. This will enable you to set a threshold (or not) based on the minimum productivity that is acceptable given the different key accountabilities, and goal-setting confidence, for the different selling roles.