The Coaching Effect Blog

The Coaching Effect Blog

    Sales Compensation Plans, Step 5: Set the Upside

    by Jaime Davis-Thomas / September 17, 2010

    Editor's Note: This guest post from Bob Malandruccolo has been updated for accuracy and comprehensiveness on June 15, 2020. Photo by Hattie Kingsley Photography. 

    The fifth step is choosing the amount of upside of incentive pay for high sales performers. For this example, $100k is the total target pay level. Pay mix in this example is 50/50, so the base salary is $50k and the target incentive is $50k. The definition of excellence is the beginning point where the top 10% performers are paid. In this example, the upside is $100k so the total pay would be $200k for high performers. The ratio between upside, $100k, and target incentive, $50k, is a 2 to 1 ratio.
    Now we go back to the competitive pay analysis. Competitive pay analysis is a way to peg the excellence pay level. The competitive pay analysis should show the 90th percentile of the market. This is a good starting point for determining what the upside should be. It's a starting point because the Design Team would determine whether that level is appropriate or not.
    Sometimes, market data does not have sufficient data points to support the 90th percentile. What should you do? Well, what I have seen oftentimes is that, for some industries, a ratio of 2 to 1 is what the market data shows. It is interesting how many times that ratio turns out to be true. So there is another data point to estimate upside. Either way though, the Design Team will need to make a decision on upside and eventually, cost modeling will validate whether upside to confirm affordability, desired pay and performance relationship, and to help refine the payout curve as needed.

    You should also check with peer organizations. 


    Step 1 is defining the Sales Compensation Philosophy or Strategy. It is developed by the Steering Committee and the philosophy guides the Design Team during the design process. Read about this step here.  

    Step 2 is determining which Eligible Roles are included for sales compensation treatment. Learn more about this step here.   

    Step 3 is selecting the Total Target Pay Level for each sales role. This represents the mid-point pay level for target performance.  Read about this step here

    Step 4 is determining what the Pay Mix should be for each sales role. Pay mix is the ratio between base salary and incentive pay at target performance. You read about this step in this blog

    Step 5 is choosing the amount of Upside of incentive pay for high performers. You just read about this step! 

    Step 6 is selecting Weights & Measures that are linked to incentives for the plan. Learn more about this step here

    Step 7 is determining whether the plan should be based on Commission or Bonus or both. Read more about this step here

    Step 8 is defining the Structure Details of the plan including threshold and excellence levels and the payout curve. Learn more about this step here

    Step 9 is choosing the Frequency of Payouts for each measure. Read more about this step here

    And finally, Step 10 is determining the Administrative Details included in the plan. Learn more about this step here

    Bob Malandruccolo is the founder and principal owner of Sales Force Effectiveness Consulting. With over twenty-five years of practical business, management and consulting experience in sales and marketing, Bob has worked with a broad range of clients from Fortune 100 corporations to small, closely-held firms with special emphasis on sales and marketing process implementation. He has worked closely with his clients through hundreds of successful engagements and implementations across multiple industries (manufacturing, engineering, distribution, software, healthcare insurance, medical products, healthcare, automotive, telecommunications, retail, information handling, media). Article Source:

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    Tags: Compensation Plans

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