December 01, 2016
by Mark Donnolo, Managing Partner, SalesGlobe
When Julie walked into the VP of Sales’ office and said she’d like to talk about possibly leaving the company, I watched all the color drain from his face.
Julie was a top performer in the sales organization — the top performer, to be precise. But she was not the top earner in the sales organization thanks to poorly designed sales compensation plans and punishing quotas. Each year Julie knocked it out of the park she was “rewarded” with a higher quota the following year, making it more and more difficult to get to the upside in her comp plan.
She made good money, but she didn’t make great money. She mentioned that her peers at similar companies earned a significant amount more than she did for similar levels of sales results. And because of this company’s watercooler culture, she also knew what her lesser performing peers down the hall earned.
“Why is there such a wide gap between my performance and the other reps’ performance, and yet we’re all living the same lifestyle?” she asked the VP. “I know what they make and it’s not that much different.”
I’ve seen this situation at more than one company. Without really understanding it, the organization was acting like Robin Hood — taking from the high performers and giving to the average and low performers. By not taking action, the company was building its sales culture in the wrong direction.
This company, like so many others, needed a Reverse Robin Hood Principle to differentiate its top performers and help retain them for the long-term.
How the Reverse Robin Hood Principle Works in Sales Compensation
The Reverse Robin Hood Principle establishes that an organization doesn’t overpay the low performers, but instead significantly rewards the high performers. Instead of paying low performers below threshold, the organization uses those funds to reward the top performers.
Upside potential is the best way to differentiate your top performers through their sales compensation plan. Upside potential is the above target incentive pay that a salesperson can earn if she exceeds quota and reaches higher levels of performance in the sales organization. A top performer is usually a person at the 90th percentile of performance or above.
Upside is defined as a ratio of target incentive. For instance, a plan may have the potential to pay 200% of target incentive to a 90th percentile performer. In this case, if target incentive is $50,000 with a 50/50 pay mix the plan would have upside potential of an additional $50,000, paying 200% of target incentive. In the same fashion, a plan could also pay 300% 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.
Retain Top Performers with the Right Sales Compensation Plan
Believe it or not, some companies have very little to offer reps above quota. And this means there’s minimal incentive for salespeople to reach beyond their goals.
However, organizations that know how to use the Reverse Robin Hood Principle typically set the pace with leaders in their industries.
According to Lucky Young, director of compensation design and operations at Salesforce.com, top performers can get paid up to eight or 10 times their target.
“There’s no question; we have a very aggressive comp plan that pays well,” Young said. “The incentive plan is a motivator. That’s the bottom line.”
Does your company use the Reverse Robin Hood Principle in its sales compensation plan? How is it working for you? Share your thoughts in the comments.