So I’d just like to share my thoughts on this topic, and then hopefully kick off a discussion.
First, I want to say that I understand the rationale behind not paying individual contributors in certain roles based on commission (even if they do generate a large amount of profit for their respective company).
For instance, if an employee is entrusted to make conservative financial decisions then you want said employee to make responsible choices that yield consistent, steady returns as opposed to engaging in high-risk behaviors (that may or may not be in the long term best interest of the firm). In these cases, it’s perfectly fine to tie an employee’s incentive pay to company metrics as opposed to giving them a straight % of the profit they generate. The caveat here of course is that industry matters.
That said, I’ve seen situations where companies still hold compensation down (by either not paying profit centers on commission or else capping commissions) even if risky/reckless behavior is not a factor. This seems to (primarily) be done to keep individual contributors in a given role within the range of a band… the thinking being that it may not be in the best interest of a firm for there to be too significant of a disparity between a managers’ pay and individual contributors’ pay.
If there is, it can be difficult to get the most talented people to enter the management ranks (where a company wants a certain % of their top individual contributors to go even if it takes them out of the field). In my opinion, the right solution in these cases is to build an incentive structure that has large enough cash bonuses and equity to make entering the management ranks attractive… but I acknowledge that in cases where commissions are unlimited for individual contributors it can sometimes be impossible to build an appealing enough package while still maintaining equity within the comp structure. In addition to the manager / individual contributor dynamic at play here, in certain organizations operations can come to resent the comp packages people on the commercial/sales side have.
Ultimately I think that outside of concerns with internal equity / effectively attracting top-performing individual contributors to management ranks, there don’t seem to be any huge pluses to capping commissions when risky behavior is not a factor. Even when talking about extraordinary sums, as long as the % on a sale is modest any additional sales are ultimately good for the business. You want to incentivize your rainmakers to generate as much revenue (and profit) as possible.
The flip side is that by capping commissions your most talented individual contributors (who generate the most money for the firm) may leave for competitors who pay them a straight % of the profits they generate.
What do you think?
Share your thoughts below.