Structure of incentive payout curve

Designing a payout curve is one of the most important steps to ensure that the incentive plan is aligned to broader corporate goals and has enough potential to entice salespeople to sell more by incorporating understanding of the selling process and competitive environment. Payout curves define the impact on potential incentive payout based on various performance levels and can be used to drive the desired sales behaviors. A well-designed payout curve helps in hiring and retaining top sales talent and motivates existing salespeople to achieve more sales and excel in the field.

An incentive payout curve defines the relationship between target achievement % and the associated payout for different levels of performance. Payout curve design needs to be such that it allows desired differentiation based on the performance. It is imperative to model various inflection points on the curve to meet the overall brand objectives.

General Definitions

Threshold:

Threshold is the performance point below which a salesperson is not paid any incentives. It should be set for each product separately to account for the specific behavior and market conditions for the product. The placement of the product in the product life cycle also plays a significant role in deciding the threshold. Thresholds are generally set at a performance so that around 90% of salesforce achieves that level of performance.

Target:

The target refers to the performance level of a salesperson where they reach 100% of the earnings for that product. It is generally set at achievement of 100% of product quota allocated for the territory where the performance is being measured.

Excellence:

Excellence refers to the peak performance point beyond quota for the salesforce. About 10% of the salespeople are expected to achieve excellence performance. This is also the point which corresponds to a higher incentive payout than at target.

Deceleration:

Deceleration is the reduced rate (linear slope<1) at which the payouts can be achieved.
Acceleration: It refers to the higher rate of payout per point increase in performance (linear slope>1).

Cap:

Cap refers to the highest payout that can be achieved in the plan for a product. Once a salesperson achieves the performance equal to the cap, no more incentives will be earned for any further increase in sales.

Summary

Payout curves tie many different aspects of incentive compensation together like the company sales strategy, salesforce motivation, retention of talent, and the financial balance of revenue and incentives paid for it. Designing a payout curve is an amalgamation of mathematics and the art of management. Inaccuracy in the payout curve may cause loss of employee motivation, misplaced sales strategy and eventually losing the brand value and market share for the company.