As fiscal budget planning comes to a close for most businesses, I wanted to share a little food for thought as compensation planning comes into full swing.
Over the years, I’ve seen more than a fair share of commission and bonus structures (Some good, some bad). Historically I’ve found best plans to be ones that do not require an abacus or legal degree to comprehend. However, there is one type of compensation plan that I always urge caution around developing…. The “all or nothing” compensation plan: hit 100% of your metrics – get your bonus, miss by 5% – get nothing. Nothing can kill the morale or demotivate a team more than the feeling of working for nothing.
There are few core reasons “all or nothing” compensation plans typically fail:
– So Far Behind: When a team member is so far behind their number, they realize mathematically it would be impossible to hit. At this point, most people take the foot off the gas or start looking for a new job. With the thinking; why put the effort in, when they are not getting the benefit on the backside?
On the flip side, you can financially motivate that same team member by just a change of the compensation plan. Creating a plan that compensates based on actual quota obtainment, will motivate someone to go just that much further. Because at the end of the day 90% vs 80% of a bonus, is a much better than knowing you’re mathematically out of a bonus completely.
– Morale Killer: The “all or nothing” compensation plan is also a huge killer of team morale. There are always those team members that putting in a solid quarters or years’ worth of effort, to only miss a bonus by 5 or 10%. Noting makes an employee feel more unappreciated than missing out on a bonus by only a few percentage points.
Compound that by a few employees (because it’s never just one), and you now have a real morale problem throughout the team going into the next fiscal quarter or year.
– Overachievers Get Hurt by This Model Too: Typically, with all or nothing plans you’ll have steps and or compensation caps in in place. Especially with caps, you are demotivating your best reps to only perform up to the cap, because there is no motivation to go beyond it.
One organization comes to mind, where there was a compensation cap of 125% in place, anything beyond would receive no additional compensation. Every year in November, there were a few teams that would hit their 125% ceiling and would effectively take the remainder of the year off. Great for them, however the company lost almost two full months of employee productivity.
Additionally, another aspect to consider when planning out a compensation plan, is removing all roadblocks to paying out on plans. Nothing is more demotivating to a team, than when they have to fight for the compensation they’ve already earned. It gives them a sense that the company really doesn’t have their backs.
Let’s face it that in today’s talent market, financial motivation plays a big role (of course it’s not the only reason) in why your employees want to work for your company. It’s also a big motivation factor of keeping your employee’s happy and motivated while they work for you. Choose your commission and bonus plans wisely, and ensure that your team is compensated properly when they do hit those commission or bonus triggers. Otherwise you’ll have morale issues and productivity will take a huge hit.