Most companies use sales commission accelerators, so it's not uncommon for compensation professionals to ask themselves: how do I know if my sales accelerators are too aggressive, just right, or too conservative? In this article, we address this challenge by exploring the competitive practices and design principles behind the development of cost-effective sales commission accelerators across a variety of business situations and needs.
First, it's important understand the fundamental roles of sales commission accelerators, which are: (1) to motivate high performance; and (2) to pay competitively for different levels of performance. If your current sales accelerator program isn't delivering on one or both of these goals, that's an immediate sign that changes are probably needed.
When designed properly, sales accelerators encourage sellers to hit and exceed their goals, and they help boost payouts for high performers whiling limiting pay for low performers. The results are individual pay outcomes and overall sales compensation expenses that are competitive with the market. Without accelerators in place, goals or quotas can have far less financial impact on sales reps than intended, meaning companies run the risk of underpaying high performers and overpaying low performers.
Basic Accelerator Model
In order for a sales accelerator to become active, a triggering event must occur — usually quota achievement. The table below illustrates a basic accelerator model where sales reps earn a base commission rate of 5% for all deals closed up to quota. This base rate then accelerates two times, to 10%, for every dollar sold above quota.
At Radford, we call the example depicted in Table 1 above a “single-tier” accelerator. This approach is a very simple way to motivate sales reps to seek above-quota performance. You may also hear this model described as having one inflection point (at quota) and two commission rates.
So how do you know what type of sales accelerator rate (e.g., 2.0x vs. 2.5x vs. 3.0x) to select? This is where competitive benchmarking data is critical. To illustrate this point, we pulled a sample data set from the Radford Global Sales Survey:
When looking at the wide array of data above, we are most interested in two specific data points:
- Current Fiscal Year (CFY) Target Incentive Amount at 50th percentile, which is $69,952 in this sample case; and
- Last Fiscal Year (LFY) Actual Incentive Amount at the 90th percentile, which is $140,132 in this sample case.
These two figures suggest that, for the particular industry and job in question, high performers earned incentives about two times larger than the median target incentive amount (i.e., $69,952 vs. $140,132). This indicates a sales accelerator rate of 2.0x is appropriate.
We next turn to an arguably much harder question: what is considered high performance? Industry standards typically define high performers as the top 10% of salespeople in a common job title, level and geographic region. To illustrate how one might look at the issue of high performance the following charts display last year's distribution of quota attainment levels for two groups of sales reps, commercial accounts and strategic accounts, at the same sample company:
For sales reps in the Commercial Accounts group, high performance should likely be defined as reaching quota attainment at or above roughly 150%, as roughly 10% of the group performance at this level or higher. Meanwhile, for the Strategic Accounts group, 90th percentile performance appears to be at 120% of quota. If we applied the same sales accelerator schedule to both groups, top performers in the Commercial Accounts group would probably fare much better relative to top performers in the Strategic Accounts group, which may or may not be the intent of the company.
No matter the situation, it is always important to design sales accelerators with specific payout scenarios in mind for specific jobs, regions and even products. Once you begin to test how accelerators could impact different sales positions, you'll often find that a one-size-fits-all approach does not work. There is also the risk of underpaying or overpaying certain roles within your sales force relative to peer companies if you implement the same type of accelerator schedule across all sales functions.
Benchmarking Against External Data
Beyond pay data, the Radford Global Sales Survey also allows companies to benchmark quota achievement levels against specific global and regional competitors to ensure that they set quotas and accelerators in a manner the best challenges all of their unique sales positions.
The sample data set below comes from a Radford Sales Incentive Plan Practices Report, and shows average quota attainment levels for individual contributor salespeople on both a global basis and when they are located in a company's headquarter country. In the data, we see that between 6.9% (globally) and 8.0% (headquarter country) of sales reps in this particular peer group of more than 100 companies achieved 150% of quota.
Thinking back to our sample Commercial Accounts and Strategic Accounts groups, this data generally aligns with the notion that setting the definition of high performance at 150% of quota makes sense. Conversely, if the market data listed below for strategic account reps, it might suggest that a team where 120% of quota attainment qualifies as high performance is actually underachieving at all levels.
Another key input from the Radford Global Sales Survey is the average percent of incentive paid at various levels of quota attainment. The table below serves as an example:
The Commercial Accounts and Strategic Accounts positions in our example are individual contributors and, therefore part of the “Field Sales Individual Contributor” group in the far right-hand columns above. Comparing the average percent of target incentive paid at 150% of quota, our current benchmark for high performance, we see an average payout rate of 194.2% — close to 200%, or the 2.0x of target-incentive mark we established earlier.
While we can use historical data to determine probable levels of high performance and payouts, actual results can vary. Suppose we launched a plan using the accelerator schedule shown in Table 1, and then at year-end, our 90th percentile Commercial Accounts rep hits 250% of quota and the top performing rep reaches 350% of quota. The uncapped 2.0x commissions payments associated with this kind of performance might be exciting for the reps, and a potential boost to morale among other sales employees, but our financial controller may not have accounted for the expense of this scenario.
Few companies in dynamic industries like the technology and life sciences sectors can manage quotas in a way that produces predictable results. That's why some companies use caps or regressive-rate schemes to limit the “tail risk” associated with unexpected high-performance outcomes. Using a robust modeling process helps clarify this risk. Additionally, the Radford Global Sales Survey database also includes competitive benchmarks on the use of caps and regressive rates to help ensure your approach is in line with competitive practices.
In the next section of this article, we take a closer look at why payout caps and regressive rates are a more common, but complex, type of sales commission accelerator.
In the basic sales accelerator example described above, we had one inflection point at quota and two commission rates. However, it is far more common for technology companies to use multiple inflection points (“multi-tier” accelerator). For example, only about 15% of software companies in the Radford Global Sales Survey database use a single-tier accelerator for individual contributors. Multi-tier accelerators are preferable for technology companies because they do a better job of managing overall compensation spend across a wide spectrum of performance levels.
Table 5 below illustrates an example of a multi-tier model. By discounting the commission rate below a threshold level of level — under 70% of quota attainment in this case — the company pays far less for lower levels of performance relative to the single-tier accelerator in our first example. The company may want to offer a higher accelerator to those who exceed quota and can use the discounted rate paid to reps performing below 70% performance as a means to fund the higher payouts for high performers.
Multi-tier accelerators typically require companies to define potential target payouts at the various inflection points. The table below illustrates this concept:
In this example, the sales incentive plan pays 50% of the target incentive at 70% of quota, 150% of the target incentive at 125% of quota, and so on. Using targets in this fashion helps to benchmark a job's pay beyond just target performance. The process also helps to clarify the company's sales compensation philosophy and can be used to introduce mechanical features like caps, regressive rates and thresholds.
High performers often cringe at the notion of management capping their pay. Given that a primary function of the accelerator is to motivate high performance, why would companies use caps? Recall the other function of accelerators is to pay competitively for different levels of performance, including exceptional performance. In the context of Table 6, few if any reps will suffer from a cap. But without a cap, the company is exposed to the remote risk of an uncompetitive, as well as expensive, cost structure, particularly in the case of huge deals sold at low margins.
To that end, high-growth companies are more likely to use caps; however, most companies in Radford Global Sales Survey database report using regressive rates out of an abundance of caution about the kind of message compensation caps can send to employees. Regressive rates work to reduce payments above a certain amount of quota achievement, which few reps are expected to achieve. For example, in Table 6 above, this point comes at 200% of quota, after which payments are reduced by 50%.
On the other end of the performance spectrum is a decision about how best to manage pay for low performers. The best way to do this is often through soft and hard thresholds. The use of a discounted commission rate for performance below 70% of quota (Table 5) is an example of a soft threshold. A hard threshold means there is no pay below the threshold level. Implementing hard thresholds can present an issue that's inherent in a step-commission approach, where small, incremental “steps” in performance might yield significant differences in pay.
Both soft- and hard-threshold plans can present cash-flow issues for sales reps on annual quotas with relatively low base salaries (e.g., <60% of target total cash), as performance in the first half of the year can yield little-to-no commissions. Cumulative quotas, where an annual quota is divided into quarters or months with performance calculated on a year-to-date basis, can address these concerns.
Sales commission accelerators may start out as a simple concept, but as you can see, they can quickly become very complex as companies try to manage incentive pay across job types, performance levels and business dynamics. Before making any changes to your current sales accelerator approach, it's important to consider all of the key questions below:
- Do we have enough historical sales team performance data available to help us assess where to put accelerators in place; that is, at the right inflection points where a sales commission boost will actually drive higher levels of performance?
- Do we have a solid understanding for how potential accelerators might impact compensation outcomes below target, at target, above target and top performers? And, how will respective pay levels then compare to market benchmarks?
- Do we have a financial model in place to account for expected payout outcomes after an accelerator is put into place? Does this model predict reduced compensation expense or improved return on investment for sales compensation expense?
- Do we have appropriate incentive plan caps in place to prevent unintended compensation windfalls, especially if accelerators kick-in to boost payouts?
Every type of sales accelerator has its pros and cons. It's important to understand these tools and utilize the best model for your company's unique situation.
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