Let’s look at one of the most exciting components of the sales compensation plan. It’s the part that can support or detract from the desired sales culture, and it lets top performers know whether they can really be significant earners. Upside potential is the incentive pay, above target incentive, that a sales person can earn if she exceeds quota and reaches the higher levels of performance in the sales organization. A top performer is usually a person at the 90th percentile of performance or above.
Typically the upside potential earnings at that 90th percentile point of performance is set as a factor or multiple of pay at risk. Upside potential refers to an earnings point above which the rep can continue to earn. Upside potential doesn’t indicate that there’s a cap on incentive pay.
Upside is defined as a ratio of target incentive. For instance, a plan may have the potential to pay 200 percent of target incentive to a 90th percentile performer. In this case, if target incentive is $50,000 with a 50/50 pay mix, the plan would have upside potential of an additional $50,000, paying 200% of target incentive to the 90th percentile performer. In the same fashion, a plan could also pay 300 percent of target incentive to a top performer. The amount of upside potential is usually determined by the competitiveness of the market to attract and retain top performers and the margins of the business to sustain a certain level of pay for top performance.
Without the upside potential, the incentive compensation plan favors the company because it only pays up to quota. The risk is all assumed by the rep; if she doesn’t make her quota, she won’t earn her total target compensation. But if she knocks her quota out of the park, she’s not rewarded much more. Upside potential balances out the risk and reward equation for the rep, making it worthwhile for the rep to put that pay at risk rather than just take a flat salary.
Believe it or not, some companies have very little to offer reps above quota. There’s minimal incentive to reach beyond their goals. In that case, usually the employee seeks a job with a company willing to pay her upside.
Organizations that know how to use the Reverse Robin Hood Principle typically set the pace with the leaders in their industries as one example illustrates with a top performer who recently made $4.5 million in one year. “We had another person who made $2 million, another who made $2.5 million and then we had about 10 to 15 people that made over $1 million,” says Lucky Young, director of compensation design and operations at Salesforce.com. “That’s probably eight to 10 times their target. So, there’s no question; we have a very aggressive comp plan that pays well. The incentive plan is a motivator. That’s the bottom line.”
How much cash should a top sales person potentially earn in a given year? More than her manager? More than the head of sales? More than the CEO? The answer to this question is indicative of an organization’s pay philosophy and its ability to attract and retain the best talent in the industry. When we asked C-level executives, nearly all agreed that a top sales person could earn more cash in a year than the head of sales. While that high earning rep may be a different person each year, and this earnings level may not be attained every year, that event would not be unheard of in the organization. In fact, C-level executives noted that these events would be motivational to the organization. As for earning more than the CEO, many C-level executives philosophically agreed that this wouldn’t be an issue given the right level of sales production, but it’s not usually realistic. Nevertheless, “sky’s the limit” potential is inspiring to reps who see no limits to their capabilities.
The Reverse Robin Hood Principle states that an organization doesn’t overpay the low performers but instead significantly rewards the high performers. Instead of paying low performers below threshold, the organization uses those funds to reward the top. That’s a big challenge for a lot of organizations. This principle makes a statement about philosophy that ultimately affects the sales culture. If the company operates as a meritocracy that emphasizes accountability and applauds performance, then the Reverse Robin Hood principle fulfills the promise of opportunity. If it operates with a collectivist view on balancing rewards, the Reverse Robin Hood Principle can wreak havoc on the culture. That may not be a good thing if the organization likes that collectivist culture. However if its strategy, according to the upstream decisions in the Revenue Roadmap, is to move the roles and talent in a more sales-oriented direction, the Reverse Robin Hood Principle may be just what it needs.
Next week I’ll write about upside and downside. Contact me at firstname.lastname@example.org with any questions.