8 Reasons to Not Cap Commissions
Sometimes there comes a topic that you feel you really shouldn’t have to write about based on its absurdity, but yet, writing about it is warranted because the “thing” nobody should be doing is still being done.
And yes, this is one.
So if you’re capping sales commissions? Stop. And please don’t. Here are a few reasons why:
- It’s de-motivating. 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.
With sales incentives, that’s what you’re doing when you cap commissions. If incentives are reduced after reps meet quota or a percentage above it, you are forcing them to stop once that level has been met. Worse, you’re sending the message that instead of wasting time and effort racing full steam ahead, you can just coast until the system doesn’t allow you to coast any longer.
- It breeds mistrust. Two things here. One, how can you get up and preach success, success, success, and then put a limit on what that success can actually be? How are you ever going to get a rep to buy into that? Why should reps work to get better at their craft if they know getting too good won’t really put them ahead?
Second, capping commissions also communicates that you aren’t necessarily looking out for reps’ best interests. If you truly want reps to be successful and earn the money they need to support their lifestyles, a cap communicates the opposite. With both of these points, it just leads to reps not being able to trust the company and people they work for to have their best interests in mind.
- It reduces profits. With all of this, it’s not that I can’t understand why on earth someone would ever employ a commission cap. I get it. Commission caps are typically used to control spending, or put into play when leaders are worried about reps making more than managers do. Those are valid points, and thus, capping might seem like a good idea under those circumstances.
But, there is more to consider. For instance, our data shows that most reps don’t meet 120 percent or more of their target incentives. In other words, if you cap your plans, you’re telling your reps to put on the brakes at a certain point—and that point could be well below what some reps are ever capable of reaching in the first place.
- It doesn’t really achieve the goal you thought it would. Per the points above (and below) capping your commission plans usually leads to unintended results. While you might be successful in stopping a few reps from going above and beyond their quotas, you’re affecting other important areas, in both the short and long term, that will just end up costing you If you’re worried about blowing out forecasted amounts, think about how hard it’s going to be to forecast when you’re creating false barriers?
And a quick side note for a product plug, when companies use a tool from Xactly, with its advanced modeling and forecasting tools, this forecasting worry is non-existent. Again, you want to motivate your sales reps by sending the message that what’s good for them is good for the company. Sure, they might receive a large check, but if you’re prepared to write it, the revenue that they bring in is going to be more valuable than what you could ever save in spending.
Organizations cap commissions to protect themselves from cash-flow issues and unexpected accruals, but as Doug J. Chung from this HBR article states, “companies sell more when they eliminate thresholds at which salespeople’s marginal incentives are reduced.”
- It flies in the face of traditional sales psychology. Sales reps work on commission for a reason—because they know if they put in the work and are successful, the reward and opportunity ahead of them is greater than that of a salaried position. For the company, it’s a win-win situation—reps close deals and make money for the organization, and in doing so, the more money they should be paid. (There are separate points to consider when dealing with commission-only reps, but that’s for another day.)
But when you cap, you’re taking this somewhat traditional thinking and approach and flipping it on its head. From just the inherent appeal of it, most reps wouldn’t get into sales if their opportunities were capped. Remember, your compensation plan drives the behavior you seek. Capped commissions undermine your efforts to inspire your sales force.
- It clouds reality. Switch gears and take football for example. The “pay cap” has become the bane of NFL owners and coaches everywhere. If value is determined by the worth a team wants to assign a certain player, a cap throws the system out of whack. Meaning, team A says player 1 is worth $5 million, but team B says that same player is actually worth $8 million. What’s that player’s value on the open market? Not an average of the two, but the highest.
Similarly, in sales, you might be assigning a 100% attainment value to a rep that is actually worth 120% if you gave them the chance to fully perform. But sadly, with capped commissions, you’ll never know.
7. It accelerates turnover. In an uncapped system, the commissions earned today set the standard for what could/should be earned tomorrow. For the rep, they know blowing out their quota leads to a payday, but also, that there is the chance to earn even more in the future as their quota increases and increases. Take that away, and you’re left with a rep looking for an opportunity elsewhere that offers more upside.
8. It “wastes” precious time with star reps. Turnover is part of the game you play with any profession. Thus, you really only have a set amount of “peak time” with most of your reps, that is, before their performance begins to decrease, and/or before they start looking for another opportunity. If you cap commissions, the clock is already running, and you’ll be missing out on striking when the iron is hot.