This one is tricky since the usual percent of goal type payout table just doesn’t work in these situations. For example, if a small business had a business plan that included an operating loss of $200,000 for the year, putting together a payout table to reward for this “success” would not work if the mechanics were communicated as a percent of the goal, which might be restated as
Goal: Operating Income = -$200,000
To build the payout table, we’ll need threshold and excellence performance levels, a target payout, and a leverage factor.
Threshold = -$400,000
The Threshold is the level of performance below which no payout is earned. Usually the goal is aligned with the annual operating plan. No payout at all below goal means goal setting precision must be very high. A modest payout as goal is approached is often a better design.
Excellence = $0 (breakeven)
In this case where a loss is expected, it may be the case that breakeven would be a fabulous result for the coming year. If so, a handsome reward could be delivered at that point.
Target Incentive = $10,000
Someone reading this is thinking that it’s hard to pay an incentive to reward someone to deliver a loss. And clearly this is not a sustainable business model for the long run. But in come-back situations, or years of investment, it may be a great idea to have those who influence the outcome with compensation at risk, along with upside, for delivering against the annual operating plan.
Remember that we’re talking about sales compensation here, so the assumption is that the incentive pay is true at-risk pay, not over-and-above pay. The person with this incentive opportunity has put some portion of their market value at risk with the expectation that they do influence the outcome materially, and that when they do a great job they could earn back all that they have put at risk, and then some.
So what does the payout table look like? Here’s a sample:
|Annual Operating Income||Payout|
|Better than break-even (positive OI)||$20,000|
|$100,00 loss to break-even||$15,000|
|$200,000 loss to $99,999 loss||$10,000|
|$300,000 loss to $199,999 loss||$5,000|
|$400,000 loss or worse||$0|
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.