- Evaluating your plans. Companies shift from ramped commission to bonus formula plans to better align sales teams with the company’s aggregate growth expectations.
- Common challenges. Challenges with ramped commission plans include unclear pay differentiation between low and high performers, lack of workload balancing flexibility and no direct tie to company growth goal.
- Driving better results. Organizations shift to bonus formula plans and increase upside pay to drive greater growth incentive while maintaining neutral cost.
Mature companies with continuing growth aspirations commonly evaluate the significant leap from commission to bonus formula plans. These commission rate plans are often found in certain industry segments and with small, high-growth companies. The ramped commission mechanic — paying increasing rates with higher volume — is used to provide greater incentive for higher revenue.
However, as companies evolve, their ramped commission plans present challenges to unlocking efficient annual growth. Ramped commission plans inhibit workload balancing between sales representatives through territory optimization. They impact hiring flexibility, and the pay level is largely dependent on the current territory volume instead of the new sales representative’s qualifications.
But most disturbing to growth-oriented companies, ramped commission plans place a greater incentive on maintaining a large territory than growing it annually. This conflict between an individual sales representative’s incentive and that of the company causes leaders to reevaluate the ramped commission mechanic. Many restructure their pay levels and mechanics to place greater incentive on year-over-year growth than long-term volume accumulation.
Here are three common challenges with ramped commission plans:
- Unclear differentiation between high- and low-performers. Commission rate plans allow for sales reps to accumulate volume and incentive compensation over time. However, most companies require year-over-year profitable growth to expand their enterprise value. Sales representatives’ compensation plans don’t align with the organizational objective.
- Low motivation to achieve year-over-year growth. Upside pay (incentive earned by the 90th percentile performer) is challenging to accurately establish and is often under industry benchmarks. This results in relatively low motivation to achieve year-over-year growth compared to bonus formula plans.
- Lack of workload balancing flexibility. Balancing workload between sales representative territories is an effective way to increase sales team productivity. However, ramped commission plans inhibit territory-balancing initiatives. Shifting revenue from a high-revenue territory to a low-revenue territory inherently creates an incentive pay decrease for the larger territory.
Sales Compensation Growth Levers
Many companies have already evolved their incentive plans to address these challenges. There are three core initiatives that companies can undertake to ensure they drive better results with their sales compensation plans.
- Adopt bonus formula incentive plans. The bonus formula mechanic, when structured correctly, increases sales organization motivation to exceed yearly goals. This mentality aligns with what investors demand from the company in aggregate. The challenge is how to make the shift. There are a number of ways to make the transition from plans with minimal quota impact to those where annual quotas matter significantly. Consideration must be given to recent actual pay, transition plans and high-performer pay. But when it is modeled and implemented, sales organization motivation to drive annual growth is impactful.
- Increase upside while remaining cost-neutral. Sales representatives need to clearly see the differentiation between high and low performance is significant to give the extra effort. First, companies must define high performance — tied to year-over-year growth, not just long-term accumulation of accounts. Next, incentive plans must be structured so there is a highly apparent difference between how much high-performers and low-performers earn. The use of thresholds is an unpopular but necessary component. And when combined with significantly higher pay above quota, the sales organization will see this as an opportunity. Further, when modeled correctly, companies can achieve this without increasing total sales compensation cost.
- Evolve pay mix. The next generation of sales talent is demanding reasonable base salaries. The days of zero-base salary, all commission are numbered. Even companies with base salaries but with aggressive pay mix are struggling to attract the next generation of sales talent. This is not an argument to increase base salary, cost and drive complacency. When structured correctly, a higher base salary mixed with thresholds and higher upside pay provides a win-win situation — the opportunity for higher pay is substantial and the cardiology company’s total cost remains the same. Companies must evolve their sales compensation philosophy to avoid losing talent.
There are many challenges and opportunities facing companies evolving their sales compensation plans.The magnitude of this transition should not be understated. It requires strong leadership, communication and change management efforts. The changes must be made delicately to avoid disruption and turnover. When done correctly, the result is accelerated growth.
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