Assuming your high earners are also your most valuable sales people, it’s actually possible for their goals to go up each year, and for their earnings to go up as well. Usually it’s most appropriate for the earnings to increase at a somewhat slower rate than the goals so that the cost of compensation as a percent of sales falls slightly each year.
The problem occurs when stellar performance this year results in a very high quota next year (calculated as a percent increase over this year’s results), and so a significant risk that the new higher quota will not be attained next year. Sales person frustration will be compounded if, in addition, there is a relatively high threshold below which no payout is earned (e.g., 85% or 90% of quota), and total compensation at target does not increase with added quota. If all of this aligns, then the sales person who wants to maximize total earnings over the long run may do best to adopt a pattern of dramatic over-performance in one year followed by dramatic under-performance the next year. Most sales people in this situation, even if they realize that the high-low-high-low pattern is their best strategy do not intentionally execute it. But they are painfully aware that top performance will not go unpunished.
To avoid this situation, consider these suggestions for quota-based plans:
- Set quotas based on territory potential, not just prior year actual sales.
- Avoid setting low quotas for weak performers and high quotas for strong performers, unless you…
- …Offer higher total compensation at target to those with the highest quotas, perhaps adjusting both the base and the variable pay at target for them.
- Set any threshold at the level of quota attainment below which performance is truly unacceptable. And you know what’s unacceptable because you actually terminate or reassign people who perform at this level, and it’s probably not more than 5% of your sales people. (If you have more than 10% or 15% of your sales people below threshold, earning no variable pay, and you’re not putting them on a performance plan or moving them out of the role, then your thresholds are too high.)
- Offer meaningful acceleration for over-achievement so that the added risk of next year’s higher quota (if that’s what will happen) is offset by the added compensation for this year’s over-achievement.
Donya Rose, CSCP, is Managing Principal of The Cygnal Group. She is a recognized expert in sales compensation plan design, regularly speaking at conferences and writing published articles. She serves clients from F500 to growth-stage businesses, and advises WorldatWork on sales compensation hot topics and best practices.