Top 5 Reasons Cited for Capping Sales Commissions
By Heather Peterson
At its root, commissions serve as a motivational tool to drive sales performance. These “carrots” are the foundation for an incentive system to evaluate a sales representative’s productivity. Sales reps that reach or exceed the goals are rewarded while sales reps that do not meet goals provide a business with insight into performance, projection, people or product issues.
The sky is the limit attitude creates a world of opportunity for people to do the best they can yet makes executive teams nervous. How does the CEO really feel about the sales team earning more than they do? Yet, placing a cap on commissions acts like putting in a ceiling to make reaching the stars impossible. A cap limits the amount of commission that can be earned thus diminishing the incentive to go above and beyond. What does the sales rep do after they reach their quota or cap in the period? Do they slow down sales opportunities to bank for future periods? Do they go on extended vacations? Placing a cap on commissions raises concerns for performance as the motivation to sell more fades.
Here are the Top 5 items that could be influencing the decision to cap a sales rep’s performance.
- Sales rep compensation plan is set to not exceed a key executive salary position.
- Plans are “hand me down” incentives that have been used for years but no longer represent the current market, competition or product evolution
- Financial Budgeting or Forecasting process does not correlate growth goals with specific sales comp incentives. A sales rep notices commissions paid for selling hardware are greater than software sales. Human nature will drive the rep to the path with the greatest personal return at the expense of business goals.
- Do not believe the sales team is capable of meeting such goals and put in a cap to protect from “runaway earnings” in the event they were wrong.
- Lack understanding of how commissioned sales impact on the bottom line of the company.
CEO David Cocks, CM Global Partners, knows the importance of the balance between free reign and capped commission. David notes, “A good reason to cap the commission plans might be because the plans were not designed tying the financial data to the sales representatives projections which could create a fear of creating a run-away plan that causes the company to lose money or not provide a return to shareholders.”
David Cocks went on to further explain, “If on the other-hand the commission plans can be designed with a contribution-based approach, sales representatives are responsible for contributing their fair share towards corporate expenses and profit. Once that contribution has been made, they are able to keep most of the rest of the revenue they bring in. By tying the P/L (Profit and Loss Statement) or forecast fixed and variable costs to the comp plans, then there would be no need to cap the commissions provided that all the variable expenses are covered including the shareholder constraint on return on revenue.”
Tools such as CompensationMaster eliminate the concern for decreasing productivity commission caps by looking at the best interest for the sales rep and the company. Real knowledge of the impact of a commission plan on the profitability of a business is a “win win” for company management and the sales team. Corporate management can show they audited the sales plans not only for the best interest of the company’s financials but also the reps. CompensationMaster provides a stress test that is a tailored solution to a business. In a case study provided by CompensationMaster, sales reps experienced more stability and improved opportunity to increase earnings due to a variety of new commission plans. In another case study the same company created new highly competitive plans where associates earned higher commissions once they covered their share to the company. In every situation a solution was found for increased profitability, higher morale, and improved customized commissions plans.
CompensationMaster and CellarStone recently teamed up to provide sales compensation plan analysis, optimization, and automation. Together CellarStone and CM Global Partners strategically provide the client with the ability to better understand the financial impact of sales commission plans on a company’s P&L and to determine if reps are being paid what was intended. Once plans are evaluated and adjustments implemented, CellarStone’s QCommission product is available to automate the sales commission management process to ensure optimal earnings. Their partnership offers businesses a 360 view of the impact of sales comp plans on the bottom line.
About CellarStone Inc. CellarStone is a premier solutions firm in the Sales Performance Management arena. CellarStone works with IT, Finance, Human Resources and Sales to manage and implement variable pay and sales commission systems. The CellarStone solutions have been successfully implemented for companies in many industries including, Retail, Banking, Staffing, Manufacturing, Consulting, Investment Management, Insurance, Mortgage and many others. For more information please visit www.QCommission.com, www.Qxchange.com, www.Easy-Commission.com, www.webKPI.com, www.CommTrack.biz and CellarStone.com.
About CM Global Partners powered by CompensationMaster
CM Global Partners strategic approach to developing and managing merit-based compensation systems has been proven over nearly three decades to accelerate revenue, motivate the sales force, and build long-term, sustainable financial stability into a business. Today, more than 60,000 sales representatives in a variety of industries around the world are working under compensation plans designed through the CompensationMaster system. More information is available at www.CompensationMaster.com.
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