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…
For sales people tasked with growing an established business, a threshold can be the key to focusing them on growth.
This is a common question, especially for smaller companies, whose resources are limited. It’s certainly understandable for a manager to want to develop an incentive plan that only pays out of the company profits (if there are any).
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.
This is a topic on which sales leaders and finance people have strong opinions. While I’ll discuss some of the nuances around the topic below, my bottom line is that most people should achieve or exceed quota.