As a startup, you’re facing aggressive sales targets, and it might be a challenge to structure a fair bonus incentive scheme for your sellers. Let’s explore an approach that could work well for you.
TLDR Mindmap: Here is a mindmap of this blogpost, created by ChatGPT+Whimsical:
First, let’s consider the most common challenges from a seller’s perspective:
- The sales targets can be overly aggressive and sometimes feel unfair, making them hard to reach. This raises the risk of not earning any bonus.
- The bonus is paid at the end of the fiscal year. This means waiting several months, and if I leave for another company in the meantime, I end up with nothing.
- I’m often asked to handle tasks outside of my selling duties, which takes away time (and money) from my primary role.
- When I exceed my sales target significantly, the incentive or bonus doesn’t quite match up with my achievement.
Now, let’s look at how to create a sales bonus plan that addresses these challenges.
1.Split the Bonus inTo two parts: Revenue Bonus and Soft Metrics Bonus
The idea here is to create two distinct and independent types of incentives. One will be strictly dependent on sales revenue (Revenue Bonus), and the other will be based on non-monetary based targets (Soft Metrics Bonus).
For example, the target for the Revenue Bonus could be 100k USD in net new sales per year, while the targets for the Soft Metrics Bonus might include achieving 1 flagship win with a key enterprise customer (e.g., one of the top country banks), co-selling with 2 strategic partners, winning 1 competitive account, etc.
You should divide your available bonus budget between these two categories. For example, allocate 75% for the Revenue Bonus (RB) and 25% for the Soft Metrics Bonus (SB). So, if the potential total bonus compensation for a seller is 100 USD, the seller would earn 75 USD for meeting the Revenue target and 25 USD for the Soft Metrics part. Even if the seller earns 0 dollars from the Revenue part, they could still win the 25 USD from the Soft Metrics part.
2. Revenue Bonus: Create a “pay as you go” scheme
In our example, you’ve set a target of 100k USD in net new sales revenue for your seller. So, what happens if they achieve sales of 50k, 70k, 90k, or 99k USD? How much should they earn based on their progress?
Here, the best solution is to set a low-cut threshold and reward linearly up to 100% target achievement.
For instance, you can set the low-cut threshold at 75% of the target. The sales target is 100k USD, meaning the threshold is 75k USD. If the seller achieves 74k USD in sales, the Revenue Bonus would be zero USD.
From the 75th percentile up to the 100th percentile, you can reward with 4% of the Revenue Bonus for each percentage point achieved.
So, for a Revenue Bonus of 75 USD on a 100k USD Sales target, the compensation would look like this:
| USD Sold | % of Target Achieved | % of Revenue Bonus Won by Seller | USD of Revenue Bonus Paid to Seller |
| 75k | 75% | 4% | 4% of 75 USD |
| 76k | 76% | 8% | 8% of 75 USD |
| 80k | 80% | 20% | 20% of 75 USD |
| 85k | 85% | 40% | 40% of 75 USD |
| 90k | 90% | 60% | 60% of 75 USD |
| 100k | 100% | 100% | 100% of 75 USD |
3. Revenue Bonus: Create bonus accelerators for target overachievement
What happens if your seller exceeds the sales target? To reward overperformance, you can introduce accelerators. It’s also wise to set a cutoff threshold above the target. This means that your seller won’t receive additional bonus after surpassing, for example, 140% of the sales target. This helps in predicting the maximum sales bonus you’ll need to pay per seller.
Consider implementing two different accelerators: one for achieving 100% to 110% of the target, and another for 110% to 140% target achievement.
For instance, you could offer a 5% reward of the on-target bonus (the 75 USD) for each percentage point above 100% up to 110%, and a 6% reward of the on-target bonus for each point above 110% up to 140%.
This creates four distinct scenarios for your seller:
- Below 75% Sales Target Achievement: This represents significant underperformance, and no sales bonus is paid.
- 75% to 100% Achievement: This range indicates near-target or on-target achievement. The bonus is predictably and fairly paid, with the amount increasing closer to the target.
- 100% to 110% Achievement: The seller is rewarded for overperformance, with the potential to earn an additional 50% of the sales bonus (5% reward for each percentage point).
- 110% to 140% Achievement: This level signifies significant overperformance, offering an even greater incentive. The seller can earn up to 180% of the sales bonus (6% reward for each of the 30 percentage points).
In total, this sales bonus structure can yield anywhere from 0% to 330% of the on-target sales bonus (the 75 USD) for the seller. It’s structured to be fair in cases of below-target achievement and effectively incentivizes overperformance.
4. Soft Metrics Bonus: How to Structure, Measure and Be Fair
n the Soft Metrics Bonus, consider including sales-related strategic metrics that aren’t measured in USD. These could encompass strategic wins, presenting at key events, securing competitive wins, supporting sales with partners, collaborating with the marketing department, and creating new pipelines in strategic new segments.
It’s important to quantify these expectations and be specific. However, this bonus cannot be entirely objective. It’s partly based on the sales manager’s judgment of the achievement level, even though some quantifiable metrics are included. You can also implement a linear compensation model, with established low/high cutoff thresholds.
Given the more “fluid” nature of assessing this bonus part, it’s crucial for your sales manager to have open discussions about progress. A minimum of two checkpoint discussions per year, and a maximum of four, is considered good practice.
5. When to pay the bonus
It’s obviously much simpler to pay the bonus once, at the end of the fiscal year, after all results are in. This approach is easier to calculate and avoids tax implication issues. However, it might be more beneficial to pay the Revenue Bonus every quarter, and the Soft Metrics Bonus at the end of the fiscal year.
Paying the Revenue Bonus every quarter means that you’ll need to create quarterly targets. It’s important not to pay for overperformance (above 100% achievement) until the end of the fiscal year, when all results are consolidated. Otherwise, sellers might face a situation where they overperform in the first two quarters and underperform in the next two, leading to a scenario where they have to “return the bonus” when the end-of-year calculation is done. This could create a tax nightmare and be unfair to the sellers.
The Soft Metrics Bonus, on the other hand, can be paid once per year at the end of the fiscal year.
Extra Note
Of course, you can adjust the reward percentages, cutoff thresholds, and accelerators in the examples provided. Hopefully, this gives you a solid framework to build a fair plan. Such a plan should aim to reward your top sellers and incentivize significant overperformance, while also offering some protection during more challenging times.