In the spirit of keeping a sales commission plan simple, many sales executives choose to use a simple straight-line methodology. In other words, 88% achievement of the sales goal equates to 88% commission earnings. Seems fair, right? It’s definitely simple. But it leaves out features and upside leverage that many sales reps and sales managers seek. Let’s explore further by introducing a variant to the straight-line sales commission methodology. I’ve also included a sales commission calculator for it.
First, restrict your thoughts to the attributes of a relative sales commission plan (If you aren’t familiar with the difference between relative and absolute sales commission plans, please first read my article titled “Absolute Versus Relative Sales Commission Plans“). Relative commission plans pay based on attainment (performance) against a pre-set target (called a “quota”). A single sentence summary of a relative commission plan might look like this: “Your quarterly sales quota is $150,000 in new revenue and your at-plan commission amount is $12,500 per quarter.”
Side Note: The phrase “on target” is commonly used and is the same as “at-plan”, in that both denote the amount of money (commission payment) to be made if the established sales targets are exactly achieved.
There are four potential concerns with a traditional straight-line commission plan. Let’s review them before evaluating possible solutions.
Upside Reward (leverage)
Most sales reps expect to be excessively rewarded if they exceed their targets by large margins. If they achieve 150% of their quota, they don’t want to just make 150% of the sales commission plan, but instead want to make something like 180% or 200%.
Making Up for Laggards
If a sales manager has any sales reps performing below 50% in a given period, it’s really hard for that manager to make up for the miss across other sales territories. This is because of the clustering that often happens around the 100% mark.
A sales rep that regularly makes 75-85% of their sales commission plan could be too comfortable from a total earnings perspective (base salary plus commissions). It’s never good if a sales rep is financially comfortable with commission payments that come with below-target performance. Imagine having a whole team of such reps and the overall impact to the company’s financial results.
Leverage for Sales Management
Depending on the size of the sales team being managed, it’s likely that the performance at the first line sales management level regularly stays within a somewhat narrow range of perhaps 75 – 125%. And with a large team and multiple layers of sales management, the Sales VP might regularly finish in the 90 – 110% range. That doesn’t offer much upside or downside in earnings, neither of which are good. Just imagine the net profit impact of regularly missing your top-level revenue target by 10%. You shouldn’t feel good about paying your Sales VP a full 90% of their commission plan for that performance.
A common conclusion from the above-mentioned issues is that it is often better if the sales commission plan instills more “pain” for poor performance and more “pleasure” for exceptional performance. The good news is that a relative sales commission plan doesn’t need to payout in a straight line.
Modified Straight Line Method
The modified straight line method starts the initial commission payouts at some agreed minimal performance level. As an example, sales reps earn nothing until they reach 40% of their target (quota). Once the minimum performance threshold is set, the slope of the payout line is re-calibrated so that 100% performance still equates to 100% payout. This means the higher the starting point for payouts (the minimum performance threshold), the steeper the resulting payout line.
This plan is still simple to understand, and I use it all the time. It also introduces the advantage of built-in accelerators and decelerators. I’ll explain that further using the example graph below.
The graph above reflects a minimum performance threshold of 50%, which means that each 1% of performance above that equates to a 2% commission payout. There is extra pain (decelerator) to the sales rep if they finish below 100% (for example, notice that a 70% attainment only pays 40% of the at-plan commission amount). Conversely, there is extra pleasure (accelerator) above 100% (notice that a 150% attainment pays 200%).
The desired effect of the modified straight line is for the sales team to aggressively scratch and claw to at least reach the minimum payment threshold. But since they don’t actually hit their target commission earnings until they get to 100%, they will work hard to reach that milestone. Notice that even reaching 90% of the target only pays 80%.
After reaching 100%, the sales rep isn’t motivated to save their additional sales opportunities for the next quarter. That’s because of the accelerators. If they want to make some real money on this sales commission plan, they’ll work their ass off to regularly be above 100% to take advantage of the accelerators.
Side Note: As suggested previously, the volatility and variance of performance at a sales executive’s level is much lower than an individually-contributing sales rep. This is because the executive’s results are an aggregation of all of the sales professionals (reps and managers) that report to them, and that tends to average things out. In other words, where individual sales reps might finish in a range of 40 – 200% of quota, that range of variance for a sales executive is almost never seen. Because of this, you might set the minimum threshold for a sales rep at 40%, a sales manager at 50% and a sales VP at 60%.
Click on the graphic to the right to download a compensation plan modeling spreadsheet that includes two variants of the straight line sales commission plan compensation methods described in this article (scroll down to the Compensation Resources section of the page to find this resource). Feel free to modify it and share it with others.
The second variant you’ll see in the model gets more fancy with the treatment of the accelerators and decelerators. One benefit of it is that it offers at least some commission payment for performance that is below the minimum straight-line threshold. One downside is that it is a little more complicated to explain and another downside is that someone that regularly finishes in the 70-80% range will earn 70-80% commissions, and you might not like that result.
A sales commission plan is a very important, but delicate, tool to properly motivate the sales team. Done properly, everyone’s interests will be aligned and magic can happen. Done poorly and all sorts of chaos and misbehavior can ensue.
Make sure to first understand the 5 Golden Rules for Setting Sales Compensation Plans and then decide if an absolute or relative sales commission plan is best (see related article here). If it turns out a relative commission plan makes sense, then decide if a modified version of the straight line methodology helps you instill the proper motivation and alignment with the company’s culture and financial objectives.