Short answer: Almost always, no.
Long answer: Capped commission is a very sensitive and complex subject within sales incentives. Let me first define what I mean by ‘capped commission’.
What is capped vs uncapped commissions?
Capped commissions and uncapped commissions refer to two different types of compensation structures for salespeople.
In a capped commission system, there is a maximum amount that a salesperson can earn in commissions for a specific period of time, regardless of how many sales they make. This type of commission structure is often used to ensure that salespeople do not earn excessive amounts of money, or to control costs for a company.
So what are uncapped commissions? The opposite of capped. In an uncapped commission system, there is no limit to the amount of money a salesperson can earn in commissions. This type of commission structure incentivizes salespeople to work harder and sell more, as they have the potential to earn unlimited amounts of money.
Capped commission means there is a ceiling of what you can earn when you generate revenue over a certain point. Example: You earn 10% of any revenue you generate up to $1MM in sales per year. Any revenue over $1MM you generate you earn 0% on.
Capped commission is NOT the same thing as a milestone bonus you can only earn once. Example: you earn a $1,000 bonus if you hit your quarterly quota. You don’t earn anything if you’re less than 100% of your quota and you can’t earn more than $1,000 by hitting more than your quota.
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Why organizations often cap commission:
- They’re afraid of overpaying their sales reps. Ever had a rep close a monster deal? Like one that can pay their mortgage for 6 months with the commission check? It’s a great situation to be in! Your rep is happy they made so much money and your company just got a huge influx of revenue. However, some organizations decide that it’s too much to pay someone so they cap their commission.
Why this doesn’t work: Nothing is more demoralizing than closing the company’s record-setting largest deal only to have your boss tell you that you’re making half your expected commission on it.
- They want consistency from quarter to quarter. The thought here is that if you cap commissions, sales reps will spread their deals out evenly throughout the year vs. having one blowout quarter/month. If you aren’t going to earn anything on a deal, you’re more likely to close it the following month. This provides more consistency and predictability throughout the year.
Why this doesn’t work: If you work in an industry where there are literally 0 competitors and you control exactly when your prospects buy, this would help you with consistency and predictability in sales revenue. If you’re like 99.9999% of the rest of us, you run the risk of a competitor taking the deal, the prospect changing their mind, your buyer quitting, or any of 100 other reasons the deal falls through. There’s a reason ‘sandbagging’ is a 4 letter word in sales. Encouraging it with your sales incentive plan is just counterproductive.
I honestly can’t think of a single reason to cap a sales rep’s commission. If you have a good example, I’m all ears. Send me an email at email@example.com!