Incentive Compensation Pay Alignment to In-Year Quota Allocation

As we were getting ready to roll out new plan designs for one of our clients, I heard something on a call that gave me a cause to pause. The client has a quota-based annual plan that is set discretely each quarter with an annual true-up. The safeguard in the plan to mitigate the risk of overpayment is to cap the payout each quarter to 100% of the quarterly target incentive opportunity. At year-end, the annual quota and attainment will be trued-up. This means that the final payout for the year will be based on the total quota attainment for that year, reconciled to incentive payout earned to actual paid through that time. The management team has the discretion to set the quarterly number for each of the sales teams. Based on several factors including the seasonality of the business and sales cycle of some of their products, the management team will backload the quotas (the quota set for Q3 and Q4 is higher than Q1 and Q2) to ensure that the team has a realistic opportunity to earn incentive earlier in the year based on their sales efforts.

Incentive Compensation Pay Alignment Keeping all of this in mind, a leader from the company brought up a policy consideration to align the incentive opportunity for that quarter to the quota that was set for that quarter. Although that makes logical sense- align the incentive to the quota, it doesn’t solve for the problem that the sales leadership was facing which caused them to backload quotas in the first place. How do you pay a rep fairly for their sales efforts for a long sales cycle and (or) a seasonal business that picks up in the second half of the year? How do you motivate them and ensure that you can retain them when they have a potential earnings problem in the first half of the year? I should mention that the team has an aggressive pay mix. That means that base salary to incentive is 60/40 and 50/50 across the team (varied by role).

Although it is plausible to align the incentive opportunity to the quota set for a quarter (or month, or bi-annual number) it’s not necessarily the best way to communicate a plan that rewards a rep for their sales efforts and achievements that is fair to both the company and the employee.

In the end, the CRO agreed with a policy of setting quarterly quotas while leaving the TI for each quarter evenly distributed throughout the year. The entire leadership team agreed wholeheartedly including the leader who brought forward the policy to align quotas to target incentive.

Following are a few guidelines and some of our thinking, including when a policy like this could make sense for your business.

The most acceptable practice is to divide the target incentive equally across the period (in the example above it would be across four quarters) regardless of the size of the quota for that period.
Put a guardrail in place to ensure that no one will earn more than 100% of the TI allocated in that quarter. This will mitigate the risk of overpayment and the potential for someone to have to pay back incentive paid too early in the year (commonly called a claw back).

A note of caution… If a rep does not understand how the plan is being paid, sometimes if the quota is “too low” in the earlier part of the year, they may hold off on a sale and drag it out to close it later in the year particularly if they believe that they won’t meet their Q3 or Q4 number (because maybe it’s perceived to be too high). Regardless of the method you choose, ensure managers have open communication with their individual team members so that they understand and agree to the path to quota attainment, earnings, and behaviors and outcomes that are expected throughout the year.

When does it make sense to consider alignment of target incentive to sales?

Most commonly you would see this in a commission plan. Commission plans can be treated many ways. Here are the most common ones.

The commission plan typically pays the same amount per product/service sold regardless of the volume sold. This is common in very transactional businesses and those with high seasonality. This is often called a personal commission rate or true commission plan. The quota attainment may be very different each quarter, but the incentive is based on per product/service sold and is in essence aligned with quota results.
Commission plans may have a “soft” target which means when certain volumes are reached, there could be a “kicker” on the incentive earnings. Typically, this is a rate increase, or a flat dollar amount paid when certain achievement levels are reached that are paid in addition (or “on top of”) the commission paid.
Any of the commission plan methods could be used in a transactional business with significant turnover of staff on a quarterly/monthly (or even weekly) basis to align your compensation cost of sales each quarter.
Most recently we see commission plans used in transactional businesses; highly seasonal businesses that are transactional; new businesses or business lines where the quotas can’t be set (this could be a temporary situation; extraneous situations where quotas can’t realistically be set or determined). During the pandemic for example we saw a rise of commission plans being put in place as a temporary measure where quotas became completely unpredictable.

In summary, aligning your target incentive to seasonality in the business makes more sense in a commission plan because the rates can be the same all year, and it does depend on your ability and capabilities to sell throughout the year. The addition of a “kicker” or increased incentive when certain achievement levels are attained only enrich the plan.

For a quota-based plan that is annual with discrete periods, it is best aligning the target incentive evenly across the periods. Remember the purpose of an incentive plan. It’s a method of paying a salesperson with a plan that rewards them for achieving their highest potential. It should encourage and reward those who are at expected performance, and highly reward and differentiate the highest performers on your team.

SalesGlobe is a leading sales effectiveness and data-driven creative problem-solving firm. We specialize in helping Global 1000 companies solve their toughest growth challenges and helping them think in new ways to develop more effective solutions in the areas of sales strategy, sales organization, sales process, sales compensation, and quotas. We wrote the books on sales innovation with The Innovative Sale, What Your CEO Needs to Know About Sales Compensation, and Quotas! Design Thinking to Solve Your Biggest Sales Challenge.