Caps and thresholds for Business Development roles?

Caps and thresholds for Business Development roles
One of my friends recently asked me this question :
“I was hoping you could help me with a Sales Commission question.
To set the scene, we want to target quality Business Development people – niche skill set and specialist experience for this engineering company, Hay level 19-20, on about AED 50,000+.
For these type of Sales people, I feel that threshold targets (where they get nothing below this) and ceiling targets, capped at 60% annual basic, feels right and is aligned to the top company scheme as well as suggested commission caps.  But again, different views on this everywhere!
The CEO doesn’t like there being a Threshold or a Cap but these are well-paid BD people, not your low-paid, high transactional sales people – hence I feel it’s more appropriate.
What are your thoughts?”
Caps and thresholds are a topic that many companies struggle with when designing their sales incentives. Should we include them to protect the company (financially), or should we not, so that our sales guys are motivated to reach those sky-high targets we want them to achieve ?

Thresholds in sales incentives

Generally speaking, for BD roles, the practice is to have thresholds and sometimes caps implemented.
These business development roles are not the same as short-cycle sales roles which often are on a commission-type scheme. A commission typically starts to pay out on the first dollar and does not have a cap. It’s also often associated with a very low basic pay (or none) – so, definitely not the same as what you’re describing.
When the incentive is linked to the achievement of quotas and objectives that are not linked only to sales (for example, margin, milestones in a very-long sales cycle, customer retention, new business…) then in the vast majority of cases, companies put in place a threshold ie a minimum of achievement required for starting any payment. It makes sense – it’s the minimum performance expected below which a Biz Dev employee is not “paying for himself/herself” (in theory).

Caps in sales incentives for business development roles

Regarding caps, this is in my opinion less clear-cut. A lot depends on the company, its culture, and also, importantly, its capacity to set realistic objectives/forecasting.
Just as a reminder, getting to the cap/maximum, or to the very top of a non-capped plan, should be a true exception… not even 5% of the sales force.
Putting a cap is very clear, simple to administer, and you can easily budget absolute maximum cost that the plan could pay out. However it does not incentivise the exceptional employee to go even a bit further and beyond.
Not having a cap is more “motivating” for the employees in the sense that there is no official limitation to the earnings they can make.
Companies in such cases, often put in place a “flat” accelerator which in effect tends to mean that extra sales don’t bring that much more money to the employee… so in effect it limits the “risk” for the company to have to pay “too much”. It’s much easier to manage business (and financial risk) if the organisation is able to have good forecasting in order to set the objectives : this can be linked to the amount of new business vs repeat business, predictability of sales… I’d also look into size of quota vs employee costs and/or profit margin.
Putting a cap is very clear, simple to administer, and you can easily budget absolute maximum cost that the plan could pay out. However it does not incentivise the exceptional employee to go even a bit further and beyond.
One of the things I’d insist on, even more if the company does not want to cap, is to make sure that there clear and fair rules around a number of cases :
  1. windfall clauses (handling the unexpected (and not forecasted) mega-deal that “landed” on the sales person without much work on his/her part)
  2. and clawback clauses (recovering all or some of the variable compensation in case of poor performance or inappropriate behaviour for example) or even clawback on quarterly advances if year-end performance is not at the expected level.
So in short I’d say :
  • Yes for a threshold in a sales quota for a business development role
  • “It depends” for a cap

How about you ? Please share your experience with thresholds and caps for business development roles in the comments below !

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  1. John Douglass says

    Hi, Sandrine……excellent points as usual for you! In many ways, BD people are like brokers of commercial real estate, stocks and bonds, and insurance. Different areas of asset management that are likely to have different performance measures, KPIs, and objectives. It seems to me that one of the factors driving the range of incentive-based payouts could be what the competitive markets are paying, assuming the data is available. I certainly agree with your thoughts on specific caps – if performance measures are attainable, but super stretch at the upper levels, the returns to the owners are likely to be far greater than the payout to the outstanding performer(s). If market payouts, however, seem too low for motivational purposes, it seems one could still make the case for the company taking a market lead in this area. I can think of at least one organization that may need your guidance in this area!!!

  2. John Douglass says

    Just another thought, Sandrine. While we recommend incentive bonus award payouts with well thought out targets aligned with the business plan, as opposed to a traditional commission arrangement, it probably would be wise to consider payouts that occur more frequently than annually…..perhaps quarterly?

  3. Muhammad Usman says

    Spot on. Your last 2 points on Windfall and claw-back are right on the money. I speak from my experience of designing sales commission/incentive plan for insurance company. The rationale behind having cap is not only to limit the financial risk for the company but also due to the fact that business development professionals can influence client up to certain level after which its the senior leadership and other stakeholders (such as underwriting ) who influence the course of actions in on-boarding clients. For example, sales professionals can earn commission from 1% to 2% of the premium acquired with an annual payout limit of AED 500k whereby the incentive is paid quarterly to keep them motivated throughout the year. However, the managerial roles may or may not be paid quarterly because they also also accountable for the profitability of the accounts which can only be determined on annual basis and their planning horizon also spans for the annual objectives. Having said that incentive plans in industries with shorter business cycles may have shorter payment cycles as well.

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