“Should we use thresholds in our sales incentive plans?”

By Clinton Gott, Principal

Threshold usage varies by role, sales strategy, and how results occur. As noted, for high run-rate account management roles, thresholds can make sense as a large portion of revenue can often flow with little real effort. Using a dollar one plan in a high run-rate business creates de facto base salary and reduces downside risk. For new business based plans, where the first dollar of sales derives directly from a salesperson’s efforts, I usually do not recommend a threshold.

Further, it is important to decide how much pay is earned at threshold. I stay away from cliff payments at threshold, e.g., 49% of results earns 0% of pay, but at 50% of results, the salesperson suddenly earns 50% of pay. That creates a large payment for small incremental results (the dollars that push someone over the threshold). When using a threshold, I prefer starting payment at the threshold point and moving linearly toward earning 100% compensation for 100% results.

A perspective on manager plans — many of my clients see this is a prime area to consider thresholds. When measured on a rollup of individual results, one can argue whether achieving 50%, 60%, or say 70% of a manager’s total number is a “job well done” and thus worthy of incentive payments. Most clients tell me earning such results at a district, region, or country level would have dire consequences for meeting overall company goals, which makes many opt not to offer incentive payments for such poor levels of manager performance. As a result, you’ll often see some relatively high thresholds in manager plans.

Historically, the performance range of manager’s is often much tighter around goal than for the individual contributors. Threshold levels (and excellence point levels for that matter) are often set at least partly on a view of historical performance, and the goal of using a threshold is to drive performance yet hopefully not see more than 5 or 10% of participants fall below a threshold figure.