I am a big fan of quarterly bonus payouts. When they are targeted to the right behavior, everyone wins. The company reaches the revenue they need and the reps get paid for delivering.
There are two ways to structure quarterly bonuses. Goals can be cumulative for the entire year or divided into quarters.
Let's review each option with a simple example: The quota for the year is $1,000,000. Each quarter is 25% of the annual goal. There is a $5,000 bonus payable each quarter for achieving the goal.
| |
Q1 |
Q2 |
Q3 |
Q4 |
| Option 1: Quarterly |
$250,000 |
$250,000 |
$250,000 |
$250,000 |
| Option 2: Year to Date |
$250,000 |
$500,000 |
$750,000 |
$1,000,000 |
Let's compare them and discuss implications:
Quarterly - The goal is the same for each quarter - in this case $250k. What's the typical sales behavior with this option? Based on my experience consulting with many companies over a range of industries, the sales rep will attempt to hold orders until the next quarter if they are below the quarterly quota and have no hope in achieving it - putting the order in the bank for the next quarter. I have also seen that the rep will hold an order once the quota for the quarter is achieved - again putting it in the bank for the next quarter. The rep's goal is to do enough to get the quarterly bonus and set themselves up for the next quarter.
Year to Date - The rep must be on target for each of the quarters and that target is the year to date quota. There is no benefit to the rep to hold the sale, no game the rep can play. The rep must be on target for each quarter based on the year to date goal in order to receive the $5,000 bonus for that quarter.
"But, Teanna," I hear, "the rep is so far behind on a year to date basis, he'll never get any of the bonus." My usual response: why do you want to give him a bonus for underperforming?
I also often hear "what happens if in Q2, the rep has already attained $750,000, enough to earn the Q3 bonus without doing any more sales? Would you pay it out?" I respond, "Yes, absolutely. Show me a rep that is on target to exceed their annual quota and earn accelerated rates, and I'll show you a motivated rep."