This is a continuation of our blog series, Designing Your 2018 Sales Compensation Plan. Want to begin at the beginning? Click here.
In my last blog I introduced the concept of the Reverse Robin Hood Principle, which funds upside potential for top performers by establishing a threshold, below which low performers do not receive incentive pay. In this blog, I want to go into a little more detail about how upside potential really works.
Typically the upside potential earnings at that 90th percentile point of performance is set as a factor or multiple of pay at risk. Upside potential refers to an earnings point above which the rep can continue to earn. Upside potential doesn’t indicate that there’s a cap on incentive pay.
As shown in the illustration below, upside is defined as a ratio of target incentive. For instance, a plan may have the potential to pay 200 percent of target incentive to a 90thpercentile performer. In this case, if target incentive is $50,000 with a 50/50 pay mix (on the right), the plan would have upside potential of an additional $50,000, paying 200% of target incentive to the 90th percentile performer. In the same fashion, a plan could also pay 300 percent of target incentive to a top performer. The amount of upside potential is usually determined by the competitiveness of the market to attract and retain top performers and the margins of the business to sustain a certain level of pay for top performance.
Without the upside potential, the incentive compensation plan favors the company because it only pays up to quota. The risk is all assumed by the rep; if she doesn’t make her quota, she won’t earn her total target compensation. But if she knocks her quota out of the park, she’s not rewarded much more. Upside potential balances out the risk and reward equation for the rep, making it worthwhile for the rep to put that pay at risk rather than just take a flat salary.
Believe it or not, some companies have very little to offer reps above quota. There’s minimal incentive to reach beyond their goals, so, too often, the employee will seek a job with a company willing to pay her upside.
Organizations that know how to use the Reverse Robin Hood Principle typically set the pace with the leaders in their industries as one example illustrates with a top performer who recently made $4.5 million in one year. “We had another person who made $2 million, another who made $2.5 million and then we had about 10 to 15 people that made over $1 million,” says Lucky Young, director of compensation design and operations at Salesforce.com. “That’s probably eight to 10 times their target. So, there’s no question; we have a very aggressive comp plan that pays well. The incentive plan is a motivator. That’s the bottom line.”
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