According to the latest variable compensation survey published in 2016, more than 87% of business executives and sales managers believe that introducing incentive compensation is useful!
The compensation of sales representatives is based on a fixed and a variable part, the terms of which vary according to individual and / or collective objectives.
Salespeople are thus used to get a variable salary according to their results. This variable part, to remain an element of motivation, must represent between 10 and 30% of the total compensation of a sales representative, a percentage which depends in particular on the exact function of the employee and the configuration of the sales cycle in which he / she 'registered. Therefore, a question arises around the cap on incentive compensation of salespeople. Should we cap it? Some ideas in this article.
1) CONSIDERED THAT THERE IS NOT LIMIT TO PERFORMANCE IS MISLEADING
An unlimited incentive compensation is often the result of misjudged objectives
In the case where a performance is evaluated through specific objectives, it is necessary to match the required performance with the objectives set. Indeed, if a salesman is told that it can achieve several times its objectives on the same cycle, those ones are therefore under-evaluated. The definition of objectives is therefore of paramount importance in setting up a variable pay policy. It is here that the principle of "SMART" objectives for specific, measurable, achievable, realistic and time defined, makes sense.
The non-cap of incentive compensation comes from the commissioning system. Today, it is generally offered in addition to a fixed salary whereas in the past, the compensation of some positions was based solely on the commissioning rewarding sales only, so that from the first sale, commissioning was attributed, which encouraged salespeople to sell more.
The more the salesperson achieves sales, the higher his bonus is. In this configuration, the salesman who would like to increase his variable compensation significantly is encouraged to work more. One of the negative effects of the introduction of a commissioning system is its dependence on the intrinsic motivation of employees. Indeed, if the employee is not motivated to earn more, he will not invest more in the sales achievement.
2) LIMITATION OF INCENTIVE COMPENSATION AND WINDFALL EFFECT
The cap meets a need for equity between employees
According to the website emarketing.fr, a windfall effect is observed when the environment positively influences the result obtained, without this having been planned upstream. Thus, the windfall effect occurs in exceptional situations, and in some trades, it is necessary to cap the variable pay accordingly.
Take the example of a collaborator in charge of investing the savings of his clients. If one of them wins a lottery money and decides to put it in a savings contract, the employee will make a huge profit. We are here in a scenario where the game of chance can upset the performance of an employee sometimes causing problems at the HR level. Indeed, how to succeed to manage a collaborator and mobilize him to perform more when he is not aware of having benefited from a windfall effect?
3) THE INCENTIVE COMPENSATION CEILING MUST BE REACHED BY TOP PERFORMERS
Top performers must be able to reach the ceiling
If you wish to allocate between 10% and 15% of high bonuses, the incentive compensation ceiling must be achievable. It is necessary that some top performers reach the incentive compensation cap and receive the maximum bonuses.
Moreover, if the bonus scheme does not give enough importance to the top-performers, they will be tempted to limit their actions. And for good reason, if the best employees receive bonuses slightly higher than a medium-performing employee, it will be difficult to continue to motivate them until the end of the variable pay cycle, putting at risk the entire business.
