Designing great comp plans is mostly a matter of common sense. But once in a while, real mathematics rears its objective, unsentimental head, and when you ignore the math in those situations, you do so at your peril. An example of this occurs in plans that may result in…

.Deadly Sin #11– schemes that reward “pulsing the plan”

This issue crops up in accelerated schemes – that is, where commission rates increase as production gets higher. In principle, they are a great idea – they reward overachievement, encourage reps who are ahead of quota to keep their foot on the gas pedal, and are a powerful retention tool. Here’s a simple example of such a scheme, where the rep’s quota for the year is $2MM, or $500K per quarter, with commissions based on each quarter’s performance against quota:

In Scenario A, at exactly 100% of quota each quarter, the rep earns 100% of target commission income for the full year.  In Scenario B, the rep performs consistently at 150% of quota, and earns 180% of target compensation for his/her effort.  And in Scenario C, he/she achieves 100% of quota for the full year by overachieving in each of the first three quarters but zeroing out in Q4, and earns 115% of target annual compensation.

There’s a certain justice here: as shown in Scenario B, the rep who consistently exceeds quota has an effective commission rate higher than the target rate. And Scenario C shows that the rep who brings in business early also receives a reward – although not quite as large as the 150% producer. After all, what company wouldn’t be delighted to have sales reps have their entire year in the bag by the end of Q3? And hungry for more production in Q4?

Unfortunately, this particular plan also delivers the following result:

This is an even truer example of “pulsing the plan,” the rep has done nothing but allow two full quarters’ worth of business (Q1 and Q3) to drag into the next quarter (Q2 & Q4, respectively). This performance not only causes sales management to hit the bottle, this perversely earns the highest commission rate of any of the five scenarios shown above.

Sometimes the best-intentioned comp plans go astray because the designers forgot about the math.  Accelerated comp plans are a terrific idea, and there are ways to make sure they can’t be “pulsed.” But that’s a topic for another blog.

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