Uncapped Commission, Rising Cost, and a New-Market Exodus
Vertex Supply Co. is a $180 million industrial distributor with 85 account managers. The plan pays a 60/40 base-to-variable mix with uncapped commission on gross-margin dollars. Quotas are set at prior-year sales plus 8%. Last year 88% of reps hit quota, average payout was 143% of target, and sales compensation cost rose from 8.1% to 10.4% of revenue. The largest payouts went to reps in two mature territories that benefited from a price increase, while reps in new markets missed quota and three resigned. Finance wants cost predictability and has proposed capping commissions at 150% of target. The VP of Sales wants to lower quotas by 5% to restore motivation. The CEO wants to protect the 'hunter' culture but is alarmed by the cost trend. You are asked to diagnose the plan and recommend changes before the next fiscal year. The company has reliable CRM opportunity data but no formal territory rotation or quota-setting committee.
1. Diagnose why the plan produced 143% payout and rising cost while new-market reps failed.
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Quotas set as prior-year sales plus 8% assume stable price and territory. A price increase in mature territories creates windfall commission on revenue the rep did not create. Uncapped commission on gross-margin dollars rewards volume and price, but not collections, mix, or new-market development. An 88% attainment rate and 143% average payout mean the target is too easy and the pay curve is too steep above target. The 60/40 mix may be appropriate for hunters, but new-market reps need a different mix and a ramp. Three resignations in new markets suggest the plan underpaid for the harder job. The cost rise from 8.1% to 10.4% is a design problem, not a selling problem.
2. Evaluate the CFO's cap and the VP's quota reduction. Recommend plan mechanics that address both cost and motivation.
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A 150% cap is simple but blunt. It caps the top performers who may be creating the most margin and encourages sandbagging or leaving. Lowering quotas by 5% makes the cost problem worse. Better mechanics: reset quotas bottom-up using territory potential, not prior-year plus 8%; strip price-increase windfall from quota or commission; add a margin-quality gate so commission is paid on margin after returns and bad debt; use a pay curve with a threshold, target, and accelerators above 100% but with a decelerator for low-margin deals. For new markets, use a 70/30 mix with a guaranteed minimum for two quarters and a lower quota. Consider a bonus bank or cap only on windfall, not on all production.
3. How would you transition to the new plan and measure success?
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Transition without retroactive changes. Hold employees harmless for the current year, announce the new plan before the fiscal year, and model payouts at 80%, 100%, and 120% of quota. Create a quota-setting committee with Finance and Sales, and rotate territories on a published schedule. Measure success by cost of sales compensation as a percentage of revenue (target 8.5-9.0%), quota attainment distribution (60-70% at or above quota), voluntary turnover in new markets, gross margin, and the percentage of payouts above 150% of target. Review after two quarters.