Figure 2From “What is a sales compensation plan?”
What each plan feature does, and what to watch for
Each feature changes when effort pays. The evidence for each comes from a model, from one firm or from one study of manufacturers' revenues, and says so.
Figure 2What each plan feature does, and what to watch for
| Feature | What it does | Evidence | Watch for |
|---|---|---|---|
| Salary share | Pays regardless of the period's results | Agency models: a larger salary share where sales are more uncertain (Basu et al.; Lal and Srinivasan) | Weak pull towards selling effort |
| Commission linear in sales | Pays the same rate on every credited unit | Lal and Srinivasan: steady effort under their model's assumptions, which they warn may fail in industrial selling; in Basu et al. the optimum is convex or concave instead | Rate set on the wrong measure, such as revenue where margin matters |
| Quota with bonus | Pays a lump sum at a threshold | Chung et al.: in their model, bonuses raised productivity in every segment at one firm | Easing off once the bonus is safe or out of reach |
| Overachievement commission | Pays a higher rate above quota | Chung et al.: without it, simulated revenue 10.7% lower, most for the best performers, and profit about 2% lower at an assumed 33% margin | Cost of the extra rate against the extra revenue |
| Commission ceiling | Stops paying above a cap | Misra and Nair: less reason for effort at high output; after the cap was dropped, sales exceeded the old caps | Top performers holding orders for the next period |
| Quota raised on own results (ratcheting) | Ties next period's quota to this period's result | Misra and Nair: current effort changes future quotas, which can lead agents to shade effort; Chung et al.'s firm updated quotas on group results to avoid it | Holding back to keep the next quota low |
| Period length | Sets when results reset | Oyer: fiscal-year timing of manufacturers' sales; Misra and Nair: once quotas were dropped and pay became monthly, sales no longer differed significantly across the months of the quarter | Orders pulled into or pushed out of the period |
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Source: Author's summary of Basu, Lal, Srinivasan and Staelin (1985), pp. 267, 269, 286; Lal and Srinivasan (1993), pp. 777-778, 783; Oyer (1998), pp. 149, 160; Misra and Nair (2011), pp. 213-216, 218; Chung, Steenburgh and Sudhir (2014), pp. 165, 167, 169, 182-183. Each row names the study that reports the effect; no row is a general rule.
From the essay
Revenue operations & AI
What is a sales compensation plan?
A sales compensation plan turns credited results into pay: salary, commission, bonus at quota, caps and period. Its shape also decides when effort pays.
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