May 30, 2024

Capping Incentive Comp - Deadly Sin # 5


Randall Bolten and Bob Berry

As we near the midpoint of the sales year – at least for December 31 companies – it starts to become apparent who the really big producers are, and just how much they might be earning this year. It’s a good time to re-examine your sales commission plan if you’re one of those companies that’s commits….....Deadly Sin #5 – Capping incentive compensation..

Why do companies set a limit on how much a sales rep can earn, or how much he/she can earn on a single deal? I suppose there are some CEOs, or boards of directors, who simply don’t believe a lowly peddler should be the highest-paid employee in the company. Or perhaps they have a nagging suspicion that big paydays have more to do with luck than with skill or hard work.

Regardless of the reason, capped comp plans are destructive for a number of reasons:

  • It’s demoralizing. The best salespeople swing for the fences – for them, a big payday is one of the great attractions of their profession.
  • It simply makes no sense. Why should a company’s total commission expenses depend on whether over achievement is heavily concentrated in one or two salespeople’s results, or distributed evenly across the whole sales force?
  • Moral hazard. A sales rep who expects little or no compensation from the next deal may let that deal slide into the next plan year, when he/she is starting from scratch. Or won’t try to maximize revenue to the company if he/she is just about to reach the cap.
  • Luck is a two-edged sword. Yes, sometimes giant paydays are the result of very good luck. But there are also plenty of deals that don’t close largely because of nothing more than bad luck. Luck does usually even out in the long run. And if big production is really just a matter of luck, why have a commission plan at all?

I can’t help but feel that some CEOs institute caps out of nothing more than jealousy or resentment.

Those CEOs don’t just need to fix their comp plans… they need compensation therapy.

What are your thoughts on this subject? Let us know.