A guide to design payout curve

How to pay sales incentives to the employees?

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

On what basis should one determine the incentive payout?

The most commonly used way is to calculate performance against a target. A target payout curve plays a critical role in achieving it. It also helps maximize sales personnel's potential and mitigate any negative behaviours. While setting up a payout curve, the company needs to consider a few elements, such as the cost it incurs, competitive opportunities, disruptions, and the availability of required resources. A well-defined incentive plan with clearly outlined milestones is all it takes to motivate your sales team.

Why is a payout curve essential?

Setting up a payout curve is necessary as it motivates and brings out the best in the employees. A situation may occur in which the company either overpays or underpays its 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.

A well-designed payout curve helps in driving desired behaviours within the sales team. It encourages individuals to strive for excellence by setting achievable yet challenging targets. The payout curve establishes a threshold point, target level, and point of distinction, motivating salespeople to surpass their performance and reach new heights.

The main components of the payout curve are as follows: 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 a 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. The company's ability to predict the market, financial condition, and demand for the product or service forms the basis for this decision. However, just like a coin has two sides, the cap also has its pros and cons.

Caps are less about math and more about people, behaviours, and psychology. Hence, they deter the motivation of the salespeople and 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 future demands, payout caps have an advantage as they protect the business from unknown events. Caps also ensure high levels of customer service for complex products that require a long implementation cycle.

Final Thoughts

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 company's needs and meet the salespersons' expectations. Do you feel the need to design a payout curve for your company? If yes, then feel free to reach out to us.