A guide to design payout curves

We all know what the term incentive means in sales. One of the key aspects of a great incentive plan is to define threshold and excellence levels that motivate sales personnel during their on-field activities. Lack of it these elements impacts the organization's overall performance and that is where leaders run into questions like:

How to pay sales incentives to the employees? On what basis should one determine the incentive payout?

The most commonly used way is to determine by calculating performance against a target. A target payout curve plays a critical role in achieving it. It also helps in maximizing sales personnel’s potential and mitigating any negative behaviors. The cost incurred by the company, competitive opportunities, disruptions, and availability of required resources are few elements that need to be considered while setting up a curve. A well-defined plan with clearly laid out milestones is all it takes to motivate your sales team.

Why is a payout curve essential?

Setting up a curve is necessary as it motivates and brings out the best from the employees. A situation can arise where the company is overpaying or underpaying the employees. To avoid such scenarios and to keep your employees encouraged, you have to make sure that you choose the right curve & design it phenomenally. The main aim is that the right people get paid for the right level of performance.

The main components of the payout curve are as follows:

Threshold: This is the entry point of achievement where the payout plan begins to pay commissions. Below this point, there is no payout

Target point: The target point is the performance level of the salesperson where they reach 100% of the earnings of that product. It's the minimum amount of money the sales team needs to generate to meet the company budget or quota

Excellence: At this point, the salesperson hits the target beyond payout. The point of excellence is the level you would expect from your top 10th percentile performer

Cap: Cap refers to the highest payout that can be achieved. Irrespective of further sales, above this point there are no payouts.

Considerations for setting threshold for payouts

• Set at the lower end of analyst predictions
• Set at the lower end of a company’s peer-performance range
• If the markets are growing, set above the previous year’s results
• Set at a point on the curve where salespersons have a 90 percent chance of triggering the minimum payout

Considerations for setting excellence for payouts

• Set at the highest end of analyst predictions
• Set at the highest end of a company's peer-performance range
• Set line with the previous year's performance or record-level company performance, whichever is appropriate
• Set at a point on the curve where salespeople have only about a 10 percent chance of hitting the maximum payout

Should there be a performance cap?

The most important challenge is whether to cap the payout curve. This decision is based on the company’s ability to predict the market, its financial condition, and the demand for the product or service. However, like a coin has two sides, the cap also has its pros and cons.

Caps are less about math and more about people, behaviors, and psychology. Hence, they deter the motivation of the salespersons and thus hinder the sales process as there is no incentive to keep the top performers going. This also trickles down the middle and low-level performers. Nevertheless, in unstable markets, where it is impossible to predict the future demands, payout caps have an advantage as it protects the business from unknown events.

Summary

The payout curves are effective when implemented correctly. These curves motivate the sales team to work more diligently, so choose the threshold, excellence, and cap points with utter care and consideration. To conclude, the payout curve should cater to the need of the company and meet the expectation of the salespersons. Do you feel the need to design a payout curve for your company? If yes, then free to reach out to us at [email protected]