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Find out the benefits and drawbacks of capping or uncapping commissions, as well as what the experts at Qobra have to say about it!
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, Business Developer, 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)
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:
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.
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:
Let's now analyze the additional reasons and arguments put forward by companies in favor of de-capping commissions:
"This one also gives sales reps more confidence because we don't put limits on their performance."
Didier Ledoux, Sales Rep for Volvo Trucks
"Increasingly, candidates are extremely scrutinizing the bonus model."
Vladimir Ionesco, Director of Global Sales Performance at Doctolib
"There's no mystery, a good commission plan drastically impacts retention, motivation and performance."
Vladimir Ionesco, Director of Global Sales Performance at Doctolib
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?
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€
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€
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.
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 have increased from €20,000 to €60,000, i.e.: (16 x €20,000 + 4 x €60,000) x 1.45 = €812,000.
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.
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.
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