Hi Snoopypryer,
Thanks for the valuable info. It's very helpful. Please keep sharing such valuable info.
Dear Diva,
Variable compensation, by definition, means compensation at risk and is therefore tied to performance measures - at the individual, team, or organizational level. The frequency of the variable compensation payout could be biannual (every six months) or annual. However, I have also experienced monthly and quarterly payouts in some companies. Typically, in such cases, where there were monthly or quarterly payouts, the performance criteria underlying such payouts were either team or individual performance against pre-established targets or some combination of both team and individual performance. I have also witnessed three-level filters being applied to determine the variable compensation payout. The first filter is the organizational performance, meaning if the organization has not reached a particular milestone, then, regardless of whether some department in the company has over-achieved its targets, there will be no variable payout or the payout may be less than the proportion of overachievement of the department. The second level of filter would be the department's performance. This means that if the organization has achieved its targets but the department has not, then individuals in that department do not get the performance-linked incentive or less than the proportion that they could have expected based on their individual achievements. The last filter is usually the individual's performance.
The number of filters and their relative weightages in determining individual performance-linked incentive payouts, as well as the methodology to link the payout to these filters, flows directly from the values and compensation philosophy of the organization. Regarding the quantum of variable compensation for sales personnel, I would suggest that it be fixed at least 40% of the fixed annual compensation. For example, if the fixed compensation is Rs. 100, then the variable should be at least Rs. 40. It is not uncommon to have 50:50 or 40:60 ratios between fixed and variable compensation. The idea is that the salesperson should not be resting on the comfort of a fixed salary but rather earn most of their income through variable compensation linked to the achievement of sales quotas. An enthusiastic salesperson should realize the significant upside potential of earning mainly through the variable compensation route, since overachievement against quotas should typically result in more than a 100% variable payout. Some organizations have a sliding scale mechanism to determine variable compensation payout, which means that if the individual achieves 60% of the sales quota for a period (month, quarter, or year), they get 60% of their variable compensation, and a 120% achievement will result in a payout of 120% of the variable compensation. However, it is not uncommon for organizations to lay down 'Floors' and 'Ceilings'. 'Floor' means the minimum achievement required for a person to qualify for a payout. For example, if the 'Floor' is kept at 50% of quota achievement, then if an individual achieves 40%, they will not receive any payout. Similarly, if the 'Ceiling' is defined as 120% of the achievement, then if an individual achieves 130% of the quota for the period, they would get only 120% of their variable compensation as the maximum payout and not 130%. In some organizations, they follow the 'Accelerator' principle, meaning that the payout for more than 100% achievement gets multiplied by a certain factor for different ranges of overachievements.
Hope this has been helpful.
Thanks, Snoopypryer.