By Beth Carroll, The Cygnal Group

I often tell my clients that the good news about incentives is they work…but the bad news about incentives is…you guessed it, they work. What this means is you need to be very careful how you design your incentive plan or you just might end up dealing with some unexpected consequences, and possibly paying out more than you intended, or worse, getting no measurable return (or negative return!) for dollars you are spending.

There are many books written on the topic of sales compensation and most of them are long, technical, and have examples that are not especially relevant to the logistics industry. In this article you will learn the basics necessary for developing well-thought out incentive plans for logistics companies. There are six high level task categories for incentive design, and they should be tackled in this order (it is easy to get the cart before the horse, and start talking about pay frequency or commission versus bonus BEFORE you’ve even established your business objectives, but this can lead to confusion and yelling among the design team members, so it’s best if you just take it one step at a time):

1. Define your business objectives & sales strategy
2. Define your selling roles and determine incentive plan eligibility
3. Establish total compensation, pay mix & leverage for each role
4. Determine the appropriate performance measures & weights
5. Develop the plan mechanics, including optimum pay frequency, and
6. Develop a thorough and comprehensive implementation plan.

1. Define your business objectives and sales strategy. You don’t start off on a trip with no idea where you are headed, nor should you develop an incentive plan without an idea of what you want it to accomplish. An incentive plan is a powerful tool that should accomplish far more than simply delivering pay to your people. Spend some time with your leadership group developing a clear business plan, with defined objectives, and then figure out the appropriate sales strategy to help you accomplish these objectives. For some logistics companies this may be targeting large contracted business relationships, whereas for others is may be maximizing volume on low margin commodity freight. The sales strategy for these two extremes is of course, quite different, and would require a different skill set (and incentive plan) for the types of reps going after the business.

2. Define your selling roles and determine incentive plan eligibility. Once you have your sales strategy defined, you need to determine what roles will best support this strategy. What are the characteristics of these roles – are they primarily hunters or farmers? Are they selling transactionally where they are providing a low cost solution to a customer who wants minimal hassles or are they selling consultatively where they are crafting a custom solution to suit a particular business need? The transactional hunter has a very different profile (typical van freight broker) than the consultative farmer (the account manager for a multi-million dollar outsourced logistics contract) and they should not have the same incentive plan. You may have a large game hunter who finds the multi-million dollar account but who then hands it to the account manager to grow and develop. These also are different roles. One of the most frustrating things for sales people is to not have a clear understanding of what their role is and what is expected of them, so this is an absolutely crucial step in the process of developing incentive plans. As for eligibility, a common mistake in logistics companies is to attempt to develop incentive plans for everyone in the organization. Customized incentive plans are a powerful tool that must be carefully managed. They take money, time, and effort to get them right. I’ve seen too many companies burn too much of each in an attempt to develop and calculate customized incentives for all of their people. Customized incentives should be used only for roles that have a direct and measurable impact on business results. If you find yourself trying to pay someone for accomplishment of something that really doesn’t impact the bottom line – stop! If you find yourself trying to pay someone for something they have no direct impact on or which is not measurable – stop! Customized incentives should be used for these types of roles in logistics: broker, assistant broker, dispatcher, load coordinator, driver or carrier manager, sales or branch or terminal manager, team leader, operations manager, outside and inside sales rep, and account manager. Generally, with few exceptions, other roles should be on a corporate plan which payouts annually based on overall company results.

3. Establish total compensation, pay mix and leverage for each role. Here’s where the TIA survey comes in very handy. By matching your defined roles to the roles in the survey, you can determine how much (salary plus incentives) you should be paying at 100 percent performance. Some companies establish a philosophy of market 50th for base salary, but market 75th for total compensation. This strategy would help attract and retain top performers. Your business objectives should help inform your compensation philosophy. Pay mix is the amount of pay coming from salary, and the amount of pay coming from incentives as a percent of total compensation. A 50/50 pay mix means equal amounts come from salary as from incentives. For most farmer-type roles, the pay mix should be skewed more toward base salary (70/30 or 80/20, for example), whereas most hunter-type roles should be skewed more toward incentives (40/60 or 50/50, for example). While role plays an important part in this decision, so does company philosophy. Some companies are by nature more aggressive than others, while some are more team oriented. More aggressive means more emphasis on incentive pay. More team oriented means more emphasis on base salary.

Leverage is the amount of upside. It’s what happens when someone does a really good job. Typically you want there to be more upside the more pay is at risk. As a general rule of thumb, plans with 80/20 pay mixes have 2.0 leverage (2 times the target incentive is earned for a really good job), whereas 50/50 pay mix plans may have 3.0 leverage (3x the target incentive is earned for a really good job). These are not hard and fast rules, but guidelines. What’s most important is relativity within your company. If your 80/20 plans have 1.5 time leverage, then maybe your 50/50 plans will only be 2.5 times. Lack of leverage is the NUMBER ONE mistake being made by logistics companies. If you use a straight commission, by definition there is no leverage. Someone must double their volume to double their pay. This is next to impossible. Likewise, any quota bonus plan that pays 101 percent of incentive at 101 percent performance is doing the exact same thing, and it’s incorrect. The ratio should increase above 100 percent performance to 1.5, 2.0 or greater multiples, so that for example, 103 percent of incentive is paid out at 101 percent of performance. But be careful – you can’t continue this forever. You will need to decelerate the payout curve at some point above goal or you could end up paying out far more in incentives than you ever intended.

4. Determine the appropriate performance measures & weights. One of the best moments I have with any client is the “ah ha” moment when they realize they can do far more with an incentive plan than they ever realized — when they realize that it’s not a question of mutually exclusive choices, but of crafting a system that incorporates different parts of their business strategy. The first taste of this comes with the selection of performance measures. A performance measure must be objective, relevant, controllable, and measurable. The best measures are often found on your income statement or in your business plan or sales strategy. Common performance measures in logistics are: gross margin dollars (net revenue), revenue, line-haul, operating income, gross margin percentage, number of new customers, number of loads, safety, on-time percentage, driver retention, closed leads, renewed contracts, and customer satisfaction.

The Design Team’s task is to consider for each role which are the best performance measures for that role. The answer should be different for hunters vs farmers, and for managers vs line staff. You want to start by casting a wide net and thinking about all the potential measures for each role. Some will not work because you can’t measure them (customer satisfaction often falls into this category), others will not work because they are not controllable by the individual and may need to be pushed up to higher levels of management (operating income is a good example, as it may be fine for a branch manager, but probably not for a broker).

The second step is to consider scope. Scope is the level of measurement selected, such as individual, team, region, or company. When you combine scope with performance measure, you have created your first plan element. Once you have tentative list of elements, you need to assign weights to them. The weights must add to 100%. For example, if your broker role has a target incentive of $20,000, you might use 3 elements weighted as follows: individual gross margin 50%, individual new customers acquired 30%, region gross margin 20%. A broker would earn $10,000 for individual gross margin at target performance, $6,000 for new customers, and $4,000 for region gross margin. What if you’d also really like to include gross margin percentage and on-time percentage, but they aren’t important enough to assign a full piece of the incentive plan to? You can use these types of measures as qualifiers (a minimum requirement for payout under another element) or modifiers (a way to increase or decrease payout under another element), but be careful not to over-complicate the plan. The KISS rule most definitely applies to sales compensation design. Try to limit your weighted elements to no more than 4, with no more than 1 modifier or qualifier on the most important elements, and no less than 20% weight per element.

5. Develop the plan mechanics, including optimum pay frequency. Once you have your elements selected and weighted, you need to figure out how you are going to calculate pay (mechanics) and how often you are going to deliver pay (frequency). There are two fundamental approaches to calculating incentive compensation, and the terms used to describe them are widely misused and misunderstood. They are “commission” and “goal-based bonus.” When you are talking about a sophisticated incentive plan design, these terms mean something very specific. A commission is a way to deliver incentive pay that pays a piece of the action, such as a % of gross margin or % of revenue. Commission-based plans pay based on volume alone – those who sell more make more. The other end of the spectrum is a goal-based bonus based plan, which pays for goal attainment. A goal-based bonus is not subjective or arbitrary, but instead is tied to attainment of a pre-defined goal. (We strongly discourage the use subjective bonuses, by the way). If Sally has annual volume of $500,000 and Joe has annual volume of $250,000, then under a commission-based plan Sally will make 2x a much as Joe. However, many managers will understand that perhaps Sally has 2x the volume because she has been given house accounts or contracted business, or something that makes it unfair for her to earn 2x as much as Joe (who may be working his fanny off building a new line of business or breaking into new lanes). In this case a goal-based bonus plan would level the playing field. Under a goal-based plan, Sally would earn the same amount at 100% of her assigned goal as Joe would earn at 100% of his assigned goal. Yes, if you were to calculate the rate (pay divided by volume), they would have different payout rates, but by structuring the plan this way you are acknowledging that some business is harder to get than others, and paying accordingly. You can also combine the two approaches and use a goal-based commission, whereby the rate paid below goal is less than the rate paid above goal. A good rule of thumb is that a commission approach will work if everyone is starting from the same place and has the same opportunity (this doesn’t mean a commission is the right approach, just that it is a reasonable alternative to consider). If there are inherent differences in assigned accounts, in ability, or in support, then you might want to consider integrating a goal-based bonus approach.

One of the nice things about using multiple elements in a plan design, is each element can have a different pay frequency. In the example above, you may choose to pay the first element monthly, the second element quarterly, and the third element annually. The main considerations for pay frequency are alignment with business cycle and amount of pay delivered. If the annual target for an element is $1,200 then you probably don’t want to pay monthly as the amount after tax would hardly be enough to go out to dinner. You want to be sure the check received will be meaningful.

6. Develop a thorough and comprehensive implementation plan. You don’t want to go through all the trouble of developing a great incentive plan only to have no one understand it, so be sure to allow plenty of time to communicate (over and over) the new plan design. These steps show a typical communication plan:

1. High level power point presentation to the managers (review their plan first, and then explain their staff’s plan)

2. High level communication to the staff as a group (one off communications only lead to misinformation). Ask them questions and have them reiterate key parts of the plan back to you.

3. Provide plan documents (see my article in the March Logistics Journal for more info on plan docs), so they have the full legal wording necessary to understand and abide by the plan rules. Give them a chance to ask questions in a one-on-one setting.

4. Give them quota or goal sheets which show how much pay is earned at different levels of performance.

5. Track their performance throughout the pay period, there should be no surprises.

6. Give them individual performance reports to go along with their incentive checks so they understand exactly why their pay was what it was.

These steps for plan design are the outline, but it is only a starter map, as the combinations of elements and mechanical design choices are truly limitless, which is what makes designing plans so much fun and why there is truly no correct answer to the question “what is the right plan design for a broker in the 3PL industry.” The only right answer is the one that is right for you.

Beth Carroll is a Principal with The Cygnal Group and can be reached at 815-485-4711 or beth.carroll@cygnalgroup.com

Reprinted with the permission of Transportation Intermediaries Association and the Logistics Journal.

By Beth Carroll, The Cygnal Group

What’s wrong with the traditional, “highly variable, straight commission on margin” approach for paying your employees? Nothing…if every employee has the same opportunity, the same skills, the same training, and all your freight is from the spot market where each day is a new day and no one knows for sure what’s coming their way.

However, as this industry matures, many transportation brokers are learning that the traditional approach is no longer working for them. This is especially true in organizations with substantial business from contracted or long-standing “house” accounts or those experimenting with non-traditional organization structures (such as using strategic account managers, strengthening the use of outside selling roles, and/or splitting their organization between teams of “freight finders” and “truck finders”, who may or may not be tied together in shared dependency).

The challenge that arises in these situations is to determine what is “fair”. If you use a highly variable plan delivered via a flat commission rate, is it fair to pay an employee the standard commission rate for moving freight for a large contracted account they didn’t land? What about for freight that is generated by an outside sales person – shouldn’t there be a reduced rate on these loads when it comes to paying the truck finder? What about if you are using a team approach that generates a shared pool, but now you need to add people to the team? Or you need to move your best team leader to another group that is substantially smaller because you know he/she will be able to grow it? It each case, if you stay wedded to using a highly variable commission-only approach, you will find yourself creating “special deals” where certain accounts are paid a lower (or higher) rate than others, where you are administering cumbersome calculations to deduct the “lead generation” fee before calculating the commission, and where you are creating temporary “deals” with employees as you re-organize your staff or your accounts. You may find yourself spending more time trying to remember the different compensation arrangements you have for Joe, Sally and Fred and what the rates are for accounts A, B and C than you are spending building your relationships with your customers.

Using the traditional highly-variable straight-commission approach for incentive compensation is appealing on many levels: it’s simple, easy to understand, it’s economically “pure” so you don’t have to worry that you’re going to spend all your profits on incentives, and it’s easy to administer (at least at first). For busy business leaders, this approach feels like it should be a “fix it and forget it” solution. In addition to these benefits, the commission mechanic (regardless of how much pay is at risk in the plan) is a powerful tool that creates an intensity of focus you generally don’t find with other compensation mechanics. For these reasons, using a highly variable pay plan, with a commission mechanic to calculate pay, is perfectly appropriate for some selling roles and in some selling situations, especially pure new business hunters in start-up companies or high growth divisions of established companies. These types of roles have what is called “high prominence” – which means, in plain language, that they have a high degree of control over the outcome of their sales efforts. (I would still suggest using an escalating or de-escalating commission mechanic for even these roles, however, as it’s rarely appropriate or advisable to base an entire incentive plan on a single, unchanging commission rate.)

Where the traditional highly-variable commission-based approach does NOT makes sense, however, is for companies that have developed a substantial book of regular business, are building strong brand awareness in the marketplace, and are using multiple internal resources to land and grow accounts. In these cases, most of the employees are “less prominent” in the sales process; they are a cog in a much larger wheel that includes marketing and advertising campaigns, outside sales resources, and long-standing company relationships with customers. Using the traditional approach can hinder management from making the right changes for their business (shifting customers or load volume around) because it would be “taking pay” away from one employee and “giving it” to another. In these circumstances, the better approach is to shift your pay mix more toward base salary (at least 50/50), and make at least part of the incentive plan dependent upon the attainment of defined goals.

What is a Goal-Based Incentive Mechanic (aka “Bonus”)?
Commissions pay for volume (“the more you sell, the more you make”). Goal-based bonuses pay for attainment of a pre-defined goal (“if you beat your goal, you make more money”). Using goal-based incentive mechanics can provide more flexibility for managers to run their business to meet customer needs, target strategic objectives beyond gross margin, and manage employee pay as a motivational tool.

An example might help illustrate the difference.

Joe, who has been given a large volume of mainly long standing accounts, generates $30,000 in a given month in margin. This is down 25% from what he did the last month.

Sally, who is still developing her book of accounts, generates $15,000 this month, which represents 150% growth over what she did the last month.

A pure commission mechanic would pay Joe twice as much as Sally, even though his business is shrinking and hers is growing. Arguably, Sally is doing a better job than Joe, even though, and I can hear many of you saying it, “Joe is still bringing more money into the company.” Yes, he is. But, once a company grows beyond the point of living hand-to-mouth in start-up mode, management needs to think strategically in terms of what behaviors and results should be rewarded for the long-term growth of the company. Sally could very well be a better long-term asset, but she may not stay around too much longer if her pay is below market competitive levels (and also very likely perceived by her as being “not fair” compared to what “that slouch, Joe” is making).

Using a pure bonus mechanic, Joe might be given a monthly goal of $35,000 per month in margin, and Sally given a goal of $12,500. Management would make this determination based on previous period performance, opportunities for growth, and the overall numbers which must be hit by the organization. At 100% of goal, each would make $1,000 for the month. A well-designed goal-based plan has a range around goal (called a performance range) which allows for payout both below and above goal, with different escalation rates. At $30,000, Joe would be at 85% ($30,000 / $35,000) of his goal, and he might be paid 77.5% of his target incentive or $775. At $15,000, Sally would be at 120% ($15,000 / $12,500) of her goal, and she might be paid 140% of her target incentive or $1,400. This provides a payout that is determined by the individual’s ability to meet and exceed the goal that management has set for him/her. Next month, when management decides that Sally might do a better job managing one of Joe’s accounts, Joe’s goal would be reduced and Sally’s would be increased, to reflect this shift in accounts. Each of their incentive targets would still be $1,000 for 100% of goal attainment. Management can make this decision purely based on what is in the best interest of the customer and the company, without fear that this kind of change is taking pay from Joe and “giving it” to Sally. Instead, the discussion is entirely about who is best suited to manage and grow this particular account.

For those of you who may feel that the pure goal-based approach is not quite right for your business, or it’s too much change to take in one step, there is the comforting fact that there are millions of different ways to design incentive plans. One of these options is to use a goal-based commission, where the commission rate increases when the individual’s goal is attained. This provides a blend of reward for volume and reward for goal-attainment. Another option is to divide the incentive into two (or three) elements, one of which is paid using a commission mechanic, and the other of which is paid using a goal-based mechanic. Some companies elect to transition by using the goal-based mechanic on a lesser-weighted team measure, and the commission mechanic on a more heavily weighted individual measure. The possibilities are truly endless, and companies that are moving beyond the traditional broker method for compensating their employees are finding the answers to some of their most vexing compensation problems.

Beth Carroll is a Principal with The Cygnal Group and can be reached at 815-485-4711 or beth.carroll@cygnalgroup.com

While there is no easy answer to this question, here are three good ideas worthy of consideration:

• Lower the stakes on quota attainment – If your quotas are less accurate than usual, then plan features focused on quota attainment may need to be rethought. Some companies offer binary quota achievement bonuses ($5,000 paid when the quota is achieved), or dramatic acceleration starting when the quota is achieved. These types of plan features put a lot of emphasis on the exact value of the quota. If quotas are inexact, some acceleration might be offered at (for example) 90% of quota, continuing to 110% of quota and then further accelerating. The total payout at target could be exactly the same, but the stakes on an exactly correct quota would be reduced.
  • Risks: Moving to and beyond the exact quota will be less important to sales people.
  • Advantages: Everyone can focus on approaching and exceeding the generally expected level of productivity without a lot of arguments or attention to the exact quotas.
• Shorter measurement periods – Most sales compensation plans are based on an annual goal, with monthly or quarterly payouts for progress towards those goals. If a sales person falls behind early in the year, then they can find themselves “out of the money” for most of the year. Breaking the year into halves or quarters, with separate goals for each, can give sales people an opportunity to get back into the game after a disappointing quarter or half.
  • Risks: Sales people who have not made their total year number may still earn upside in an over-performing measurement period (quarter/half). Mitigate this by offering somewhat less acceleration for over-quota performance. Similarly, the chances of significant under-performance go up when the measurement period is shortened (less time to “catch up” from a disaster), so it may make sense to lower thresholds somewhat if you have them.
  • Advantages: More sales people are working for more of the year with the support of the motivational value of their comp plans.
• Shorter measurement periods, with quotas updated just before the start – In a year when it is very difficult to know what to expect of each sales person by Q4, it may make sense to measure them quarterly or semi-annually and announce the goal for the coming quarter just before the new measurement period begins. This treats each measurement period as if it were a sort of “mini-year,” with an opportunity to adjust as needed based on new insights into business conditions.
  • Risks: This can be a lot of work, almost like doing your annual planning exercise two or four times per year. It also risks offering upside to people who don’t make “their” contribution to the annual plan, and raises the possibility that the sum of all sales goals does not add to the annual plan. As in the prior option, reduce acceleration over quota and lower thresholds when measurement periods are shortened.
  • Advantages: Goals can be made as fair and achievable as possible – not too low and not too high. Everyone is definitely “in the game” at the start of every measurement period, so motivation is maximized.

As such changes are considered, affordability is the right focus for the modeling effort. Make sure the cost of compensation is appropriate and affordable along every section of your payout curve, taking into consideration all the people who will be paid for each sale (the field sales person, their boss, maybe an inside sales person, etc.).

If your plan year is already under way, these ideas may be worth considering as the year progresses if the quotas turn out to be problematic. If they were set too low, it may be difficult to make any changes mid-year. If, however, they were set too high, announcing a mid-year “year end” and restarting with a shortened year, attainable goals, and appropriate compensation mechanics could breathe new life into a haggard sales force.

Question

My company is in the throes of revising the comp plan for next year and one of the most hotly debated items revolves around compensating a salesperson on all business generated from dollar one for the life of the account. Currently our firm doesn’t discriminate between “new” dollars and what I’m calling “annuity” dollars- they pay the same rate over the account life whether it’s 1 year or 10. We don’t have a lot of support staff so most, if not all the account maintenance falls on the salesperson’s shoulders. Most of the heavy lifting is done during the prospecting stage & within the first 1-2 years of the relationship then the historical pattern is the revenue drops (variety of reasons outside of the salespersons control and some within).

Answer

There are several ways to put together plan mechanics in such a situation, and I have listed a few below, with some commentary.

1. First dollar payment, and “a dollar is a dollar.” This is what I believe you have now. This will focus sales people with substantial annuity business first on maintaining the base, then once that is secure, on growing new business. It generally is straightforward to track sales credit and calculate compensation – both very desirable. The cost of comp in relation to sales volume is very predictable, as is the income level of the sales person. The challenges raised by this arrangement are:

1. a. It does not recognize the increased degree of difficulty in landing truly new business – so that the time spent on new business development may not be worth the risk of not closing to a sales person who can farm established accounts.

1. b. It can result in a “phantom base” where the sales person has a large portion of their apparently variable pay that will almost certainly not vary year to year – so they have little real risk or upside in their compensation plan to help support the drive to grow.

1. c. Depending on how the compensation plans work, it may mean that each deal is paid over the life of the contract based on the comp plan in place at the time it was signed. If this is the case, the compensation administrator may be simultaneously administering several comp plans (this year’s, last year’s, etc.). This would tend to limit the company’s willingness to adjust the plans to focus sales effort on this year’s priorities.

1. d. Sales people with “rights” to an annuity stream are less likely to accept restructuring of territories to expand the sales force, reassignment of accounts, etc. This can limit a growing company’s ability to scale quickly and maximize market penetration.

2. Added payout value for new business. This is similar to #1, except that the payout on the “existing” business (“existing” vs. “new” needs careful definition) is reduced to fund a higher payout amount on the “new.” Generally the intention will be to keep total compensation the same, but to shift the emphasis to the new business a bit. This can be as simple as an increased commission rate for all new business during its first twelve months, funded by a reduction in the commission rate for existing business. This solves a above, b somewhat, and does very little to address c and d.

3. Split the compensation into a quota-based incentive for the existing business and a true commission on the new business. For the quota-based incentive on existing business, there may be a threshold below which no payout is earned (e.g., 80% of the quota), and dramatic acceleration for any over-quota attainment (e.g., double the target incentive at 120% of quota). For the new business, the payout should be from first dollar and perhaps it should accelerate over quota. In this case, business should count as “new” for the first twelve months, not just for the rest of the plan year. This approach solves issues a, b, c and d listed above; but it also undermines simplicity, makes it hard to know the comp value of existing business on a per-deal basis, and raises the stakes on setting reasonable and accurate quotas for both existing and new business.

There is not a perfect answer to this situation that will satisfy all stakeholders and be bullet-proof. But there are better and worse approaches, depending on your sales roles and your business model.

The logic for raising thresholds in this economy would be to protect profit. The logic for lowering them is that we are not nearly as confident in our quota setting accuracy in this economy – so while we “knew” that 70% of quota was unacceptable performance last year, this year we’re not so sure where the unacceptable attainment will fall. (And, by the way, that is the point at which the threshold is often set – the level of performance below which the sales person is clearly not performing acceptably, and likely to be on formal notice.)

A percentage of the first order/circulation

Use when:

• The sales person influences the size of the first order, and a larger first order is both strongly desirable and indicative of the long-term value of the new customer relationship
• There is a fulfillment/retention channel separate from the new customer sales channel that is responsible for ensuring re-ordering and growth of the account. This could be a call center or a self-service online capability, for example. In this case, the sales person’s job is to get that first order, acquire new accounts – and another part of the organization takes it from there.

A percentage of each order/circulation

Use when:

• The sales person is responsible for the first sale, the ongoing relationship, the growth of the account, or
• A team of sales people are working to take in as much transactional (not relationship-based) business as possible, and different people may sell to a given account at different times – for example, a call center with calls routed based on language or simply availability.

A fixed sum for the first order/circulation

Use when:

• The first order generally results is a satisfied customer and repeat business
• The first order may be sold at a significant discount
• The sales person has little influence over the size of the order
• Any first order, regardless of size, takes about the same amount of work.

A fixed sum for each order/circulation

Use when:

• The sales person has ongoing responsibility for processing orders/ transactions as quickly and efficiently as possible
• All orders have about the same value (profit) to the company
• The sales person has little influence over the size of an order.

By far, the most common sales incentive design is based on a percentage of each order. However, depending on the way you have designed your selling model, there may be good reason to measure and reward in one of the other three ways you mention.

While this is not always appropriate, it should be considered when:

1. The plans are goal-based and goal setting is “loose” so that some people achieve, for example, 200% of the goal. In this case, the high level of achievement could be due to a bad goal.
2. The sales people sell very large deals, which could tend to make performance “lumpy.” Oftentimes these deals are closed with help from senior leadership in the company, and often also at a lower marginal profit. While it may be harder to close a $4M deal than a $2M, it’s probably not twice as hard (and it may not be worth twice as much to the company).
3. The company has a history of capped plans. Deceleration is always much preferable to caps.

The other philosophical principle here is that you want to put as much money as you can right above goal so that the reward for getting to and beyond goal is the opportunity to live on a wonderfully accelerated slope. In fact, it’s great to put so much money there that the company would not choose to afford it indefinitely. So when you do decelerate, the rate is still quite attractive. This will serve to pull your OK performers up and over goal without causing an unaffordable high cost of comp.

The other thing to consider is the economics of the draw. Is there a valid business reason for delivering pay this way vs using a modest salary? Typically there is “recurring revenue” that is generating a relatively fixed amount of compensation that is actually acting as a base salary. I’ve found over 10 years of designing sales comp plans that 9/10 times using a 100% variable approach with a draw actually REDUCES the effectiveness of a sales incentive plan and makes it hard to attract talent vs using a modest salary + truly variable incentive. However, in some industries, this approach is the norm.

However, if you want to motivate and reward for results they themselves are capable of generating, giving them meaningful at-risk pay to “penalize” those who don’t deliver and exciting upside to reward those who really ring the bell, then you might want to consider tying their variable pay more directly to results they can personally control.

A more typical sales management variable pay plan would tie a fixed value incentive opportunity to achieving a sales or gross margin goal, with:

• No payout for performance before some threshold value (50% – 90% of goal depending on goal setting accuracy and company/market maturity),
• Increasing (but linear) payout between the threshold and the goal,
• Accelerated payout (more $/percentage point of goal achieved) for over-goal performance, and
• Deceleration or a cap at a very high level of performance (110% – 150% of goal, again depending on goal setting accuracy and company/market maturity).