Top Management
5 min read

Decapping commissions: Good or bad idea?

Find out the benefits and drawbacks of capping or uncapping commissions, as well as what the experts at Qobra have to say about it!

Jocelyn Jobert
Jocelyn Jobert
Sales @Qobra
April 19, 2023
Decapping commissions: Good or bad idea?

According to a recent study published by Primeum, nearly 9 out of 10 business leaders and sales reps believe that commissions are a necessary compensation component. Yet, according to the same source, nearly 1 in 2 respondents believe their arrangement is unlikely to retain top talent.

Among the elements that differentiate a good commission from a bad one, the capping or uncapping of the commission is one of them. 

Depending on the role held within the sales rep team (SDR, AE, CSM, Managers, Head of...), the share of commissions paid to employees can range from 10 to 50% of their total compensation.

To reach their maximum commissions, beneficiaries must achieve the individual and/or collective objectives assigned to them in advance.

But what about once they exceed the goals set for them?

On this topic, there are two major parties! On the one hand, there are those who believe that sales reps should not be paid more once they have reached their commission ceiling. On the other hand, there is another side that believes it is essential to pay them more.

What are the arguments of each party? Which one is right? Is there really an answer to the question?

🔎 The experts at Qobra have looked into the matter and decided! (Proof in the pudding)

1. 4 reasons to cap commissions

Today, most companies offer their sales reps a capped commission. In concrete terms, this means that if they exceed their objectives, they will not earn more money at the end of the month or the year. 

To understand their decision, we collected the reasons and arguments that led them to make this choice:

  • Reason #1: Capped commissions keep sales reps from selling with short-term thinking. This increases the likelihood that the product and/or service will meet the buyer's needs, resulting in a satisfied and loyal customer, which benefits the company in the long run. 
  • Reason #2: Capped commissions reduce pay inequities. This avoids potential tensions affecting motivation and cohesion within the company.
  • Reason n°3 : Uncapped commissions avoid "fridge effects". Sales reps are not tempted to accumulate contracts to trigger them over the same period in order to exceed their objectives and thus trigger a higher commission. A practice that can be detrimental to the health of the company.
  • Reason n°4: Capping commissions ensures fairness among sales reps and avoids the possibility of some of them benefiting from a windfall effect. A windfall can be characterized by an external event that allows a sales rep to earn an extraordinary commission without any real effort on his part. A situation described as unfair for other employees.

After learning more about the reasons why some companies cap commissions. Now it's time to understand what the companies that have decided to de-cap their commissions think, and to listen to any additional arguments they may have.

2. 7 reasons to remove the ceiling on compensation

In contrast to the above view, some companies are convinced that it is essential not to cap commissions. And for good reason, they believe that exceptionally successful sales reps should be rewarded!

"The primary motivational lever for Sales comes from the bonus. They are sportsmen at heart and this notion of reward versus effort versus merit is absolutely key."

Vladimir Ionesco, Director of Global Sales Performance at Doctolib

As a first step, let's look at their solutions in opposition to the reasons previously given by advocates of capping compensation:

  • Reason n°2: On the topic of salary inequalities that may be caused by the de-capping of commissions. This only occurs if the rest of the company does not benefit from the company's success through a collective remuneration and/or an employee savings scheme. These measures are essential for sharing success and creating cohesion.
  • Reason 3: The smartest sales reps may be tempted to create a "freezer effect" with an uncapped commission system. To avoid this perverse effect, it is advisable to align the timing of objectives with that of the sales cycle. 

Let's now analyze the additional reasons and arguments put forward by companies in favor of de-capping commissions:

  • Reason n°4 : Deflating commissions is a powerful productivity lever. Indeed, this way, sales reps don't stop being productive once they reach their objectives. Sales rep performance has no limits. Otherwise, sales reps are inevitably tempted to limit their actions. If the sales reps who are over-performing receive similar commissions as the sales reps who have reached their targets, it will be difficult to keep them motivated, thus jeopardizing the entire business. As proof, according to a study conducted by Qobra and Modjo on commissions in France, 74.1% of employees with capped commissions failed to meet their targets in 2022, while over 37% of employees with uncapped commissions exceeded their targets.
"This one also gives sales reps more confidence because we don't put limits on their performance." 

Didier Ledoux, Sales Rep for Volvo Trucks
  • Reason #5: De-capping commissions is a very effective way to attract the best sales reps. Indeed, since most companies cap their commissions, it is an important source of differentiation, especially for those who are able to exceed their targets. 
"Increasingly, candidates are extremely scrutinizing of the bonus model."

Vladimir Ionesco, Director of Global Sales Performance at Doctolib
  • Reason #6: In addition to attracting top talent, de-capping commissions is an unstoppable way to retain them. Indeed, by paying them according to their results, they get recognition commensurate with their performance. A system designed for challengers allows for a natural selection process. This is an important new argument when you know that the departure of a good sales rep costs the company between €150,000 and €200,000. As proof of this, 66.8% of beneficiaries of uncapped commissions are satisfied with their commissions model, compared with a satisfaction rate of only 36.3% among employees with capped commissions. (Qobra & Modjo study on commissions in France)
"There's no mystery, a good commission plan drastically impacts retention, motivation and performance."

Vladimir Ionesco, Director of Global Sales Performance at Doctolib
  • Reason #7: De-capping commissions is a way to encourage innovation and risk-taking. And the proof is in the pudding: employees are rewarded for outstanding results that are not directly linked to predefined objectives.

In addition to these counter-arguments and additional reasons, as you may have noticed, we have not addressed an important point: the cost to the company!

Indeed, the most common fear expressed by advocates of capping commissions is that paying sales reps exceptionally for exceeding their targets will cost the company more than they earn.

How about testing this theory?

3. De-capping commissions: costs vs. benefits

Examples of sales reps and financial data of a company

  • Annual Recurring Revenue (ARR): €5 million
  • Annual Contract Value (ACV): 10 000€
  • Customer Acquisition Cost (CAC): 10 000€ maximum
  • Marketing & Sales Tools budget: 1 million €
  • 20 sales reps: Fixed salary (40 000€) + commissions (20 000€)
  • Annual quota: 180 000€, i.e. a target of 18 clients to be signed each year 

Fixed costs

The fixed costs are as follows:

Marketing budget & internal sales tools + fixed salaries x expenses = fixed costs

In this example: 1 M€ + (20 x 40 000€) x 1,45 (Expenses) = 2 160 000€

Variable costs (Scenario 1: capped commissions)

The sales reps reach 100% of their objectives, i.e. 18 clients signed, and therefore receive their variable of €20,000.

The variable costs are as follows:

Number of sales reps x Commissions x Expenses = Variable costs

In this example: 20 x 20 000€ x 1,45 = 580 000€

Customer Acquisition Cost (Scenario 1: capped commissions)

The customer acquisition cost (CAC) is defined as follows:

(Fixed costs + variable costs) / Number of clients = CAC

In this example: (2 160 000€ + 580 000€) / 360 = 7 611€

In the case where all sales reps reach 100% of their target, acquiring a new customer costs the company €7,611. 

Variable costs (Scenario 2: uncapped commissions)

In the second scenario, we will imagine that 16 of the sales reps reach 100% of their objectives, and that 4 of them reach 200% of their objectives. To reward these 4 sales reps for their performance, the company will triple their commissions (even if they have only doubled their objectives). 

In this example, 16 sales reps signed 18 new customers, and 4 sales reps signed 36 customers, for a total of 432 customers. 

The fixed costs obviously remain the same, i.e. €2,160,000. On the other hand, the variable costs have changed, since the commissions of 4 sales reps has increased from €20,000 to €60,000, i.e.: (16 x €20,000 + 4 x €60,000) x 1.45 = €812,000.

Customer Acquisition Cost (Scenario 2: commissions)

This gives us the following CAC: (2 160 000€ + 812 000€) / 432 = 6 879€

As can be seen, the cost of customer acquisition is lower in the second scenario (€6,879 vs. €7,611), while the company tripled the commissions for sales reps who reached 200% of their targets.

The last word...

As we have just seen, it is essential to pay your best sales reps well by de-capping the commissions. And for proof, it is the most profitable way to boost a company's sales rep performance!

Indeed, not only is it a very powerful motivational lever to push sales reps to exceed their objectives, but it is also an indisputable tool to increase the company's profitability since it reduces the customer acquisition cost (CAC).

Another point, and not the least, is that removing the ceiling on commissions is an excellent way to attract and retain the best sales reps. Indeed, by paying them better, a company increases its chances of retaining its best sales reps, but also of attracting the best of them.

Sommaire

Jocelyn Jobert
Jocelyn Jobert
Sales @Qobra
April 19, 2023