A properly structured commission program is undeniably one of the best ways to incentivize your sales teams. After all, your employees work best when they have a goal to strive for, a horizon to reach towards. Payout curves, when designed effectively, are an excellent motivational tool to guide your sales team towards, and even beyond, that horizon. Fundamentally, a payout curve determines the amount of commission a salesperson will make by measuring their performance against a target. Ideally, it promotes improvement among both low and high performers, increasing rewards for your highest performers and increasing risk for your lowest.
Payout curves are unique to your business and their design is ultimately up to you. There are several factors to consider, and compensation administrators and plan designers may find this to be a complicated and stressful proposition. So then, how do you design payout curves that are optimal for you? Let’s look at the metrics to consider when designing an optimal payout curve.
First, evaluate if you require a minimum threshold for payout, this is the lowest point of success at which payout can begin. When utilizing a minimum threshold, at least 9 out of 10 team members should be able to reach or exceed the threshold.
The next key metric is quota. Generally, around 65% of your sales team should meet, or exceed, their quota. That said, quota setting is tricky; influenced by a variety of factors such as product line, job role, geography, business unit, and more. It is as much art as it is science. Attention should be paid to quota accuracy and how the selling environment may influence quota attainment.
If quotas are too low you end up with too many reps in the high performer category, if they are too low you get the opposite with too many in the low performer category.
Quota can obviously vary by rep, so we advise designing your pay curve based on the mean quota.
Point of Excellence
Then comes determining your point of excellence, the fabled land of the best accelerators for your highest performers, those who have gone above and beyond. This sweet spot should be reserved for the top 10% of performers, the best of the best.
Finally, deciding whether to implement a cap on payouts is essential. Caps can be beneficial in limiting financial risk by mitigating windfall situations and instances where a large payout may not be commensurate with the sales effort, or the revenue generated. However, instituting caps can unintentionally inhibit growth with no incentive for sales beyond the capping point.
Determining where you place each point, threshold, quota, excellence, and cap are incredibly important, as poorly doing so will backfire.
If your threshold, quota, and excellence points are too low, you aren’t going to achieve proper motivation. Set them too high, and your salespeople will have to stretch to reach it. To make these decisions, you must have a combination of market knowledge as well as knowing your team. Are your salespeople the type to reach your cap every time? This level of understanding is required, as motivation is a balance, too much or too little is going to affect your team’s desire to sell. In the business of sales, a payout curve is perhaps one of the most critical aspects to get right. Your relationship with your sellers must be a partnership, in which you both mutually benefit from the arrangement.