Flat vs. Ramped Commission Rates

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Flat vs. Ramped Commission Rates

Posted by Teanna Spence on Thu, Feb 12, 2009 @ 12:02 PM

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Lately, I've been getting variations of the following two questions:

What do I tell my reps when I change the sales commission rate from flat to ramped?
How does this motivate them to sell more?

Sales reps don't like change. Many see change as something being taken away from them. Clearly communicating the plan changes will go a long way in motivating the reps to perform on the new plan.

In the examples below a flat commission rate will be compared to a ramped commission rate. The amount being paid at 100% attainment is the same; the method used to calculate the payout is different based on the rates. In each example the Target Incentive is identical.

A flat rate pays out exactly the same amount no matter what the performance is. Each sale is worth the same amount to the rep. Generally it is used for measures that have a low priority. I have also seen this used to keep a plan simple. Keeping a plan simple does not necessarily mean the plan will be motivating.

A ramped rate pays out a higher rate as you sell more. As you move up the attainment curve, the sales commission rate gets larger; the earning capability on each sale is greater. Once the goal is reached, the rate usually takes off. Ramped rates work well when there are not too many tiers and big enough jumps in the rates at each tier to cause the rep to get excited to move to the next level. The rep will see how much more they can make once the quota is achieved. This tiered rate approach encourages and rewards the rep for the extra time and effort it takes to exceed their quota.

A few clients have communicated this type of change recently and met with some resistance. Not surprisingly, the reps that were resisting the change were underperformers and could not see themselves earning at the higher rate. On the other side, their top reps love the additional earning capability as they see themselves exceeding quota.

What's been your experience?

Tags: changing compensation plans, compensation plans, commission rates

COMMENTS

I have used the ramped structure on core products sold since 2006. I use the flat pay for products that are of low priority. In 2006 the Team SPH was .40. The team currently experiences and SPH of 1.0 and higher!

posted @ Monday, February 16, 2009 5:42 PM by Sharman

Teanna-

Good piece. But I have few questions.

1. Assuming underperformers provide the sales activity that tip the P&L at the margins is it always wise to subordinate their desire in favor of high performers without modeling the sales scenarios?

2. I mention modeling because the example above seems to assume those under/avg performers will maintain current production and the P&L increase will manifest with the high performers selling more (albeit at higher cost of comp). If true this could be a dangerous assumption. It seems to me the firms would want to ensure that the higher sales it's hoping to achieve on an absolute basis don't come at the expense of their margins. That is they are not strictly from the top performers. If so they run the risk of lower margin and higher cost of comp. On a per unit basis this looks good, but if the enterprise is paying higher and higher margins (%) to the few to sell more and more on a per unit basis, while the lower margin payees' production is static then this is less than ideal.

I've found the hardest thing about comp is the inherent agency conflict with the actors involved. But that's why we have you!

Kerek Taylor

cariboucrossing.blogspot.com

posted @ Sunday, February 22, 2009 4:26 PM by Kerek Taylor

Kerek,
Before making any plan changes I would model the scenarios to understand the impact of the changes to the reps. Motivator modeling allows you to change assumptions at an individual measure level. That means that you can analyze what happens if sales are at 110% and services are at 105% for rep 1 and sales are at 75% and services are at 60% for rep 2. With Motivator modeling, you can change your assumptions and create new scenarios to get a clear understanding how the plans will affect the company and the reps individually.

Also keep in mind that the high performing rep brings in more sales as related to their base, so you get additional revenue without adding additional people – that saves on your fixed costs.

The goals - balancing the incentive spending, target it to the strategic goals of the company, motivating the right behavior while understanding the impact to each rep. There is no one answer for everyone. Some companies are willing to risk attrition to position the company for growth or more commonly today, sustainability. Others are not willing to risk turnover.

-Teanna

posted @ Wednesday, February 25, 2009 11:38 AM by Thereasa Fullmer

Hello Teanna-

1. It sounds like the tool allows you to model the give and take of the scenario as presented which is what I'd expect. My point (however verbose) was simply that clients should be careful not to assume that since high production reps like the plan and are selling more absolutely that it is better for the P&L overall especially if it comes at the expense of decreased production from your marginal salesmen. What's more clients switching to a ramped plan for the first time based on best guess modeled inputs as opposed to production data should be doubly careful. The easiest example here would be how McDonald's models their sales on new or reduced price items.

2. I'm not certain you can ever technically save on a fixed cost but I take your point. Any increase in absolute sales decreases the cost on a per unit or per rep basis.

I was unfamiliar with Makana during my time with ICM, but colleagues have spoken highly of the solutions potential in the growing small and mid cap space. It sounds like you guys are doing some great work! Thanks for the conversation.

Kerek Taylor

posted @ Sunday, March 01, 2009 5:01 PM by Kerek Taylor

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Flat vs. Ramped Commission Rates

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