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September 11, 2020

Di#erent types of
sales incentive
payout curves
explained
 Written by : Amit Jain  No Comments

As an extension to our learning and

application of Payout Curves, here is last
one of the series. We started with
learning about fundamentals of payout
curve followed by best practices in
designing payout curves. With this article
we will learn about di?erent type of
payout curves that are used widely in the
pharma industry, and when to use them.

Di#erent types of incentive plans

There are two basic incentive schemes

that deAne all the di?erent incentive
plans – Commission and Bonus.

Commissions are a set percentage of

sales generated in the territory paid to
sales personnel. The commission rates
are determined on the gross margin of
the product and how much the company
is willing to share the revenue with the
sales personnel. If the sales are
generated solely from the e?ort the sales
personnel make, the commission is set to
a higher rate. If there are other market
factors involved, the commission rates
may be reduced. Commission plans are
preferred if the territories have similar
potential and the sales cycle are less than
90 days.

On the other hand, bonus structure

generally pays the sales personnel a
percentage of sales achievement or
speciAc objective. Bonus plans may also
pay a Axed dollar instead of a percentage
of incentive target when the sales
personnel achieve a predeAned
milestone. These plans work best when
the territories have uneven potential or if
the sales cycle is longer than 90 days.

Some Arms may also use a mix of bonus

and commission plans to iron out the
inconsistencies in territory potential and
to also motivate the sales personnel to
generate higher revenue.

Linear Payout Curves

Linear payout curves pay the salespeople

on a linear curve where each percentage
achievement corresponds to a speciAc
payout. The payout could be a
percentage of the product or portfolio
target or may be a speciAc dollar
amount.
The Linear curve can have a constant,
progressive, regressive or mixed
relationship with the payouts.

A constant linear curve will pay the

salespeople on a particular rate
regardless of the sales achievement.
Although this method prevents
undesired sales timing behavior, but it is
not motivating enough for the
salespeople to strive for sales beyond
their objectives.

Progressive curves solve this problem by

introducing a higher rate of payouts
above target, where the rewards for
making sales suddenly jumps if the sales
are made above quota. This rewards
your top performers and motivates them
to achieve greater sales. On the other
hand, it also brings its share of
challenges of setting the correct quota
for each territory, managing sales timing,
managing disproportionate e?ort to
boost sales of product where quota is
met and preventing windfall sales when
forecasts are too conservative.

Regressive curves tend to reduce the rate

of payouts once a certain benchmark is
achieved. This is the least popular
method among salesperson as it hinders
their capacity to earn high incentives.
Such curves are used mostly when there
are serious production/logistic limitations
and when the product sales are under
forecast.

Mixed linear curves combine the

progressive curves and the regressive
curves to make the best out of
motivating the salespeople to achieve
more than their quota and provide
protections of cost when the forecasts
are uncertain. The challenge for such
curves is to administer as it may become
complex and to set accurate goals across
territories to manage fairness.

Step Curves

Step curves are mostly used in tiered

plans where each tier has a di?erent
commission rate or bonus amount. Step
curves would be beneAcial in scenarios
where the market is unstable and the
forecasts are not accurate, but you want
your salespeople to just put some
additional e?orts to reach the higher tier
and earn additional income. Such curves
help the company keep a tight control on
the costs and they usually set the step
ranges where they are sure that the
return on the sales would be good.

Step curves are the norm for ranks plans,

as each rank or a group of ranks may be
paid a certain percentage of target or Pat
amount as incentives. Following are few
examples

Matrix Payout

When you want to have multiple

measure to determine the payout for a
product, you can use the matrix curve
approach. The sales strategy and the
quality/measurability of data may vary
across products and channels. In such
scenarios, the management may choose
to rely on multiple metrics to determine
the payout. For example, the
management may want to tie the payout
to sales achievement as well as sales
growth to determine the product payout.
On the other hand, the management
may want to put qualiAers of a di?erent
metric to on the achievement for a
salesperson to earn incentives on one
product.

Payout matrix can either be additive or

synergistic. Two or more metrics may
keep adding incentives for a product
based on di?erent criteria or may be
plotted on a matrix to produce a singular
payout.

We will explore them in the below

graphs.

Conclusion

With the availability of multiple types of

curves and the thousands of
permutations and combinations, these
curves should be able to cover almost all
payout scenarios. A company may
choose one or more metric, one or
multiple curves or a combination of curve
types, to cater to di?erent products and
segments. A company should understand
its product and the market, the culture of
the salesforce and what they want it to
be, and the company’s strategic goals, to
be able to design an e?ective payout
curve.

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Amit Jain

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