Sales Performance Management Best Practices Blog

Should I use Caps in my Sales Commission Plans?

Posted by Jerry Hegarty on Thu, Jun 14, 2012 @ 15:06 PM

To cap or not to cap, that is the question! Caps on earnings and/or payouts have been, and are currently, used in the hopes of limiting the damage of runaway commission payouts that could potentially ;

  • ruin profitability of a particular program or fiscal period.
  • have disastrous affect to non-sales functions throughout the business if rumors of exorbitant sales earnings run wild and the business struggles to connect contribution and reward.

When one looks at the use of caps, it is clear that they are employed as a means of dealing with uncertainty. Uncertainty about many things such as the future, the efficacy of the comp plan design, the balance of territory design or the accuracy of quota's referenced through out the plans. As the name implies, caps aim to limit exposure to the negative affects of runaway commissions by capping the plans at a predefined achievement level (say 200% of quota). Above this ceiling, no commissions will get paid out.

Caps are far more common to sales incentive plans than commission plans as quota based plans often have accelerators built in for over quota achievement to provide payee's with increasing rates of earnings for attainment over 100% of target. Poorly set plan parameters such as quota can result in runaway payouts if achievement of an individual or set of individuals run way past the target achievement level.

Sales leaders and designers of sales compensation plans that turn to caps to protect the business from unknown events that could result in runaway payouts may want to think twice, it is an approach that is fraught with danger and many negative possibilities.

  • Sales reps will quickly learn how to work around a capped compensation plan by pushing sales to fiscal periods where they stand to make the most financial benefit. Gaming the system in this manner is usually not in neither the sales professional’s nor the company’s best interest.
  • The best sales reps will pass on an employment opportunity that isSalary Cap bounded by a capped sales comp plan. Simpoly put, “A players” want the rewards that accompany the risk they take on by putting so much of their compensation at risk with high proportions of variable incentive pay.

If you are looking to avoid the negative effects of a capped sales compensation plan yet protect the business from the damage of runaway commissions, here are a few options;

  • If you are lacking confidence in your quota setting process and/or are uncertain about market conditions, consider a commission plan that is not based on quota but rather a commission rate that would be viewed as a variable cost to all sales.
  • If a Sales Incentive plan is the best fit for your sales strategy, instead of caps consider using decelerators (lower payout rates) in ranges above achievement excellence.
  • Be sure to proactively communicate with all levels of the sales organization so everyone understand the reasoning behind the design that fits you best.
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Topics: Sales Comp Plan Fundamentals, EVP/Sales Leader, CFO/Finance Leader, Sales Compensation Professional, Human Resources