Are sales commission caps a good or a bad thing?

Chicke Fitzgerald

December 22nd, 2016

My company is hiring its first full time sales team and I'm working on the policies and payment plans. We already know the percentage that we will be paying for a commission, with one rate for those that require a base salary and a higher rate for those willing to work on commission only (50% higher commission). It is possible for a single deal to bring in a six figure amount for the first year that client is implemented. Should we put a cap on the commission that can be earned? If we do, we plan on converting the remaining accrued commissions into equity at the then current price for our units. Then we would have a 3 year vesting program on those units, to encourage the person to stay with us.


All of our team will have a profit sharing program beginning in 2018, so they will benefit if we have wildly successful sales people, but there would still potentially be a huge disparity in income.


Thoughts?

Gerard Brandimarte II --

December 22nd, 2016

If you want them to stop selling once they reach the cap, it is.

Greg Dizzia Founder // Product, UI+UX, Engineering at Omatum

December 22nd, 2016

Putting a cap on cash commission is unwise. It'll de-incentivize hungry salespeople, driven by closing deals and getting a very real and immediate reward.


I would keep the cash commission untouched, and instead cap the equity - We use a similar structure in our sales agreements.


This will preserve your equity (which in the long run could potentially be worth much more) and keep your salespeople addicted to closing deals like they should be.


Our basic boilerplate for sales is set up like this:

  1. Split commission - 50% cash 50% equity (in the form of RSUs)
  2. Equity caps at x% - commission then goes 100% cash (this is lifetime and would need to be renegotiated once cap is met)
  3. Full clawback against commission - 30 day window on cash payment after close
  4. Fully burdened against salary and sales costs
  5. We run against the TCV for commission, not the ACV - This encourages writing contracts for as long as possible
  6. We only pay upfront after close - there are no recurring payouts

Mathew Aird Ambitious and business minded

January 4th, 2017

Terrible idea,


The vast majority of the best salespeople are motivated by cash (most, not all). Capping cash payments is a major red flag. I don't know a top performer that would even entertain the idea of taking a job with a capped commission structure on the cash component. Equity is a different story, but cash is non negotiable.



Caitlyn Ngu Founder

January 4th, 2017

I worked at a company where they changed the sales structure, and many of the sales people ended making much less than they had in the previous year. Once that happened, everything went to hell. All the new orders that came in were missing contact information, pricing/discount details, which product they purchased for which site, and some sales reps were even approving orders on the clients' behalf! There were so many mistakes on the sales orders, that implementation would finish the setup, only to find that half the sites were missing, and the account managers had to go back and figure out if the pricing HAD or HADN'T included the missing sites.

Within the year, half of the core sales team left, including their top sales rep, and they now have really high turnover.

Long story short, caps or unreasonable incentive restructuring is a terrible idea.