This is the second in a two-part series. Read Part I: The Reverse Robin Hood here.
At the risk of fogging out the right-brainers for a few minutes, we’ll share a very impactful calculation that can be helpful at an executive level. To see what a company is really paying in upside, it can evaluate actual upside earnings by comparing incentive payouts to the portion of target incentive earned at various levels of performance for the main performance measure in the plan.
For example, we recently worked with a company and plotted their quota attainment, which ranged from the 1st percentile, (lowest performer), to the 100th percentile, (highest performer). In this case, the 40th percentile performer was at 100 percent of quota attainment. That’s because the organization has about 60 percent of reps performing at or above quota.
We measured actual incentive paid divided by target incentive for each rep. If target incentive is $30,000 and actual incentive is $30,000, then actual incentive divided by target incentive equals one, or 100 percent on the vertical axis. Reps were earning about 100 percent of target incentive at about the 40th percentile of performance. As we noted earlier, the rep at the 90th percentile should be paid some multiple (for example, 200 percent) of target incentive. Similarly, the plan should also pay low performers (those around the 10th percentile) a significantly lower multiple of target incentive than an average performer.
To ensure the organization is paying a fair upside, check for two points. First, look at the excellence level, that 90th percentile indicated by the cross on the right. Make sure the company has enough upside to offer those top performers. In this example, that’s hitting about 275 percent or 300 percent of target incentive. That’s pretty significant upside. So if target incentive for all reps is $30,000, a data point in that range might represent a high performing rep who earned $90,000 of actual incentive divided by $30,000 of target incentive, which equals 300 percent of target incentive.
Second, look at the threshold area at the bottom, the people who are down at the 10th and 20th percentile payout level. In this example, they’re still being paid pretty handsomely for what they’re doing, which means the company is paying out a lot for minimal performance. In fact, there are some people getting paid near or even above target incentive, and they’re down in the 5th or the 10th percentile in performance. If the 10th percentile in this example represented the entry point where the plan started to pay incentive – at, say, 60 percent of quota – it might pay out a very minimal level of incentive, such as one percent to five percent of target incentive. This actual amount, of course, depends on the design of the payout curve.
Making sure the plan adequately differentiates high performance from average and low performance is critical to supporting a sales-oriented culture.
Next week I’ll offer a free sales compensation report card. Grade your comp plan and see where you have opportunities for improvement. Contact me at email@example.com with any questions.