Handling Compensation Windfalls
One of the less common occurrences in the world of sales compensation is a windfall, or “blue bird” sale. Sales reps love them, but they drive compensation managers (and owners who must pay them) nuts; the pay earned from incentives is often grossly out of proportion to the effort involved. Sometimes these are just lucky outcomes; sometimes a team was involved in closing a sale, in which credit accrued to one person – due to poor compensation plan rules; sometimes there are unrelated events that lead to unexpected results. For example, in transportation companies, hurricanes often create windfalls because an extraordinary amount of freight needs to rapidly move to the affected area of the country. Most recently, COVID-19 created windfalls to an unprecedented level. In this case, the dilemma becomes: how should you handle compensation calculations when a single sale, customer, or month results in performance that is several magnitudes above the norm?
First, you have to understand the particulars of the situation, but the most common solution, and one that should be written into every compensation plan Terms and Conditions (Ts & Cs), is to limit the credit from any single event to some multiple of the quota or expected performance. For example, to ensure a rep doesn’t land one single large deal and vacation for the rest of the year, you could limit credit from any single sale to 100% of the annual quota. Likewise, if you experience a month like March 2020, in which a perfect storm of events drove performance to 1000% or more of the norm, you could limit overall credit in that month to be 300% or 400% of the normal amount. Of course you should provide extra credit, but in moderation, particularly when the person or people reaping the benefit are not the cause of the extreme results.
Another thing you could do, though it is harder to add after the fact, is to use a true-up mechanic. This means that, for any short-term period, payout is limited to 100% of the target incentive. At then end of a longer period, a true-up calculation looks back over the longer period and calculates payout against the full target incentive, subtracting prior payments, with any positive value paid out at the end of the period. Depending on how the plan works, this will likely still provide a high payout to the employee, but it ensures the employee has committed through the end of the longer period to collected it. If the surrounding periods had an abysmal performance, the payout could be less overall.
Some may wonder: why not simply limit the payout? Consider the steps taken ahead of this decision, however. You have input the credit for the deal, you have calculated the pay, and only now are you decided not to adhere to the stated rules of the plan. If the rules were defined ahead of time, that no deal can be more than x% of goal, or no period can be more than x% of the expectation, then you never do the calculation to determine what the pay would be if full credit were given: there is nothing calculated that then must be taken away. This basic human psychology at work. Don’t tell someone they could have had something, but you aren’t going to give it…unless you want a very unhappy employee.
Likewise, holding payout is not recommended, and in fact in some states it is illegal, so be sure to check with your labor attorney. Once you tell an employee that they have earned their incentive, the incentive should be paid promptly according to your plan’s stated payment terms and timing.