You will be able to describe base pay, variable pay, accelerators, caps and clawbacks and what each does to behaviour.
Ask a rep what they will earn this month and watch what happens. A rep who can tell you in ten seconds probably has a pay plan that works. When they reach for a calculator instead, open a spreadsheet and say "it depends on whether the renewal counts", the plan is doing something, but you may not know what.
Every sales pay plan is built from a handful of parts. Each part pushes behaviour in a particular direction. This lesson explains what each one is and what it tends to do, so that when you design a plan in lesson 7.4 you can choose the parts on purpose. All figures here are examples, and your company's HR and finance teams will have their own rules and costs to add.
Base pay is the fixed salary a rep receives whatever they sell. Variable pay is the part that depends on results, usually measured against quota. On-target earnings, often shortened to OTE, are base plus variable pay when the rep hits exactly 100 percent of quota.
Wei Ming's draft plan for his team uses an example base of S$4,000 a month and target variable pay of S$2,000 a month at 100 percent of a monthly quota of S$16,000, the quota from lesson 3.1. So OTE is S$6,000 a month, or S$72,000 a year. Employer CPF contributions and other employment costs sit on top of pay and differ by person, so ask HR how to include them when you cost the plan.
The split between base and variable tells reps what the role is mostly about. In Wei Ming's plan, base is two thirds of OTE and variable is one third. When the variable share is large, the message is that closing new business is the job. When base is the larger share, reps hear that other work counts as well, such as account management, renewals, technical support, or long sales cycles where nobody can control the timing of each deal. Choose the split that matches what you need the person to spend their time on, since neither direction is right for every team.
Variable pay is often paid as commission: a percentage of the value of each sale. In Wei Ming's plan, S$2,000 of variable pay at a quota of S$16,000 works out to a commission of 12.5 percent of sales value up to quota. A rep who sells S$12,000 in a month earns 12.5 percent of that, S$1,500, on top of base.
An accelerator pays a higher rate above quota. In Wei Ming's draft, every dollar above quota earns one and a half times the normal rate, so 18.75 percent instead of 12.5. A rep who sells S$20,000 in a month earns S$2,000 for the first S$16,000, plus 18.75 percent of the extra S$4,000, which is S$750. Variable pay is S$2,750 and total pay S$6,750.
Accelerators reward the reps who go beyond target, and they make the last deals of a strong month worth chasing. They also cost money, which is why lesson 7.4 tests the plan at high levels of performance before it goes live.
A cap does the opposite. It sets a maximum on variable pay. If Wei Ming capped variable pay at S$4,000 a month, twice the target, the cap would start to bite at sales of about S$26,667, the point where S$2,000 plus 18.75 percent of the excess reaches S$4,000. That gives the company a predictable cost, and the risk is that once a rep reaches the cap, there is no reason to close more that period, so deals get held back for the next month or effort stops late in the year. If you use a cap, set it high enough that only exceptional results reach it, and decide what happens to deals that would have closed above it.
A clawback recovers variable pay when a sale does not stick, typically when a client cancels within a set period after signing. Without one, a rep can be paid in full for a deal that the company never earns from.
Suppose Wei Ming's plan has a clawback for any client who cancels within the first three months, a period chosen for this example. A rep closes a S$4,000 deal, receives 12.5 percent, which is S$500, and the client cancels after two months. The S$500 is recovered, usually by deducting it from a later payment.
Clawbacks need clear written rules: which events trigger them, the time limit, how the amount is calculated, and how it is recovered. Vague clawback rules cause more resentment than almost anything else in a pay plan, and how recovery from pay is done must follow employment law and the employment contract. Check both with HR before you write the rule.
The most useful question to ask of any pay plan is: if a rep did exactly what this plan pays for, and nothing else, what would they do?
Paying only on signed contracts rewards signing, whether or not the client stays. Paying the same rate on every product pushes reps towards whatever is easiest to sell, and leaving renewals out of the plan tells reps that existing clients are someone else's problem.
So check the plan against the sales process you wrote in module 4. If your process says deals should not move to proposal seen until the problem is confirmed, but your plan pays a bonus for proposals sent, the plan and the process are pulling in different directions, and the plan will usually win. Lesson 7.3, Pay plans that backfire, goes through the common ways this happens.
In the activity below you will write a one-page pay plan summary for a fictional role. Include base, variable at quota, the accelerator and the clawback rule, and add one worked example of what a rep would earn in a month above quota.
Write a one-page pay plan summary for a fictional role with base, variable, accelerator and clawback rules.
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