A relative ranking plan is one in which all sales people in a role are compared to their peers and ranked from top to bottom according to the plan measures (total sales, sales by product, margin value generated, etc.). Their compensation plan includes both their measurement criteria and the payout table showing how much the top sales person earns, the 2nd person, etc. on down to the bottom sales person (who typically earns no variable pay at all). The top sales person may earn several times the incentive at target (200% up to as high as 600% in some organizations), with the payout decreasing all the way down.
Advantages of relative ranking payout systems include:
- The dispersion in variable pay is known in advance, designed, intentional, and totally controlled.
- The total cost of variable pay for the organization can be budgeted with confidence – regardless of overall results, the total payout is unchanged.
Disadvantages, however, are significant:
- The payout doesn’t vary with overall business results – total pay delivered in a “bad” year is the same as that delivered in a “blowout” year.
- The sales people end up competing with their peers in a very real sense – “The only way for me to ‘win’ is for you to ‘lose.'” This is the reality of a relative ranking plan, and can undermine a sense of collaboration and shared success.
Relative ranking plans work best for sales forces in which collaboration is not a key requirement for success, the sales force is large enough that sufficient dispersion in pay can be created in the designed payout distribution, the sales role has limited influence on overall results (customers are buying from the company more than from each sales person, and the sales person has more influence over awareness than over the final buying decision – think of pharmaceutical sales reps).
For most sales roles, the more direct tie between performance and payout, independent of the performance of peers, provides the better combination of motivation for the sales people and alignment between sales results and the cost of compensation.