What is a Cap on Sales Commissions?
A sales commission cap is a type of compensation structure that places a limit on the amount of compensation and/or rate a rep earns when they close a deal. For example, you might design a tiered commission structure that offers a base rate of six percent per deal sold. When a rep has reached $50,000 in sales, this rate increases to seven percent. At $100,000 in sales, the rate increases to eight percent.
Let’s imagine this pattern continues until a rep hits $200,000, at which their commission rate maxes out at 10 percent. This means that even if a rep sells $300,000 in sales, the highest sales commission rate they’ll earn is 10 percent.
Why You Shouldn’t Cap Sales Commissions
According to Xactly Insights data, placing a cap on your sales incentive program may actually do more harm than good when it comes to your sales performance. While it might seem more cost-effective at first glance—lowering your maximum potential commission payout—it could be less profitable in the long run. Here are five reasons you should never cap sales commissions.
1. There’s No Incentive to Keep Going
Imagine training for a race, running that race at full speed, turning the corner for the home stretch, and then boom, you slam right into a brick wall. It doesn’t matter how well you were pacing or how fast you were going, you’re now done, and won’t be reaching the finish line in any sort of glory. Oh, and to add insult to injury, some people who have been lagging behind you will eventually catch up and reach the same wall you did.
This is the same for sales. Capping commissions demotivates your entire team. Why? It’s difficult to be motivated and believe in a vision of performance and exceeding goals when there is a limit on the level of “success” a salesperson can earn.
If incentives are maxed out at a certain level (e.g., when a rep hits quota), you are essentially telling your reps that once they meet their quota, they can stop because there’s no incentive for them to exceed their goals.
2. It Solves One Money Problem and Creates Another
While it might seem counterintuitive, you actually earn less revenue as an organization with a cap on commissions. While the goal behind capping commission may be to spend less on incentives, you have to remember that you’re putting a limit on performance.
A sales commission cap will lower your compensation expenses, but it also demotivates your team. That means you’ll pay less in incentives but also run the risk of driving lower performance, meaning you might bring in less revenue. This, unfortunately, can create an even more negative cycle of poor performance and cutting back on incentives—and in that situation, no one wins.
3. You’re Most Likely Putting a Bandaid on a Larger Issue
Sales commission caps are typically used to control spending. In most cases, this limit arises because companies fear paying out more on compensation than a rep brought in as revenue. While that is something you should aim to avoid in your compensation plan, it doesn’t solve the problem you’re most likely facing.
If you’re facing a risk of imbalanced revenue and commission payouts, it’s indicative of poor compensation planning—and capping your commissions won’t fix that. Rather, it comes down to ensuring your incentives are aligned with goals and drive the right behaviors. When your commission structure is well-designed, you can be confident in eliminating caps because if reps exceed their quota, it means you’re reeling in the profits as well.
4. The Grass Starts to Look Greener Elsewhere
Competitive pay is essential to be a successful sales enterprise. Benchmarking incentives help you gauge if your pay is strong enough to attract new talent and retain your top performers. If you’re capping commissions, you run the risk of losing reps to a competitor that pays more.
In fact, HubSpot reports that the number one reason salespeople leave their role is for a higher paying opportunity. Not to mention, if and when your top reps give their notice, you now have to cover the cost of replacing them (usually upwards of $115,000) and hope that you have newer reps ramped up to fill their shoes.
5. You’re Only Hurting Yourself in the Long Run
Compensation and performance go hand in hand—but there’s also a relationship between performance and tenure. Reps hit their peak performance between two and three years in a role, and then their performance dips after the five-year mark.
With a lower incentive to perform due to a capped sales compensation plan, you may lose top performers before they are at their highest performance capacity. This also trickles down to middle- and low-performers. If there’s no incentive for top-performers to exceed quota, they aren’t motivated to improve either.
Driving Performance with Stronger Sales Planning
In all reality, placing a cap on your commissions doesn’t benefit the growth of an enterprise. While it might appear to fix problems at first, it is definitely not a successful long-term solution. To truly drive growth and revenue, you need to design stronger incentives at the core of your sales plan.
Your entire sales plan needs to be sound for your incentives to do their job—drive performance—effectively. For that to happen, you need to align your leadership teams and use gather insights from your sales data for better decision making. The first step is taking on a data-driven mindset and eliminating information gaps.
Learn more about the importance and benefits of data-driven sales leadership in our in-depth guide, “How to Use Data to Drive Sales Performance: The Sales Leader's Guide.”