Commission Cap

Examples of Capped Commission Plans

There are a couple different methods companies use to place a cap on sales commission. In the most common example, a company limits the dollar amount of commission a sales rep can earn in a given pay period. If a cap is set at $100,000 for the quarter, once a rep has earned $100,000 in commission, they’ll receive 0% commission on any subsequent deals that year.

Or, a company might cap commissions via a tiered commission structure. For example, a sales rep can earn 5% commission until they exceed $100,000 in sales, at which point their rate increases to 7% for all subsequent deals that year; at $200,000 in sales, their rate increases to 10%. With a 10% commission cap, a rep’s rate won’t increase any further once they’ve exceeded $200,000 in sales.

The third and most common example of a capped commission plan caps commission pay at the deal level. So instead of placing a limit on the total amount of commission a rep can earn during any given pay period, the limit is placed on the amount of commission a rep can earn on a single deal. For example, if a $75k cap is placed on an enterprise rep who earns 7.5% on closed won deals, a rep who closes a $1 million dollar deal will earn $75k in commission. If that same rep later closes a $2 million dollar deal, they will still only earn $75k in commission.

Why Do Companies Implement a Commission Cap?

Commission caps are rare among modern sales organizations. However, some companies still do use a capped commission strategy for the purpose of reducing costs, usually citing one of the following reasons:

They’re dealing with temporary financial instability: Whether the market is experiencing a downturn or the company itself is struggling through a financial rough patch, a company might implement a commission cap as a means to keep costs low, or even keep the lights on.

They want to establish consistent spending throughout the year: An organization might want to establish consistency from quarter to quarter so they can forecast spending and plan budgets more effectively. They implement a commission cap to avoid spending an unexpectedly high amount on commission in one pay period compared to another.

They’re wary of overpaying for a big deal: When a sales rep closes a massive deal, they earn a massive commission payout. While they’re also generating a ton of money for their company, some businesses fear that paying a rep too much for a single deal might impact their future productivity.

The Drawbacks of Implementing a Commission Cap

On the surface, a commission cap might seem like a logical method for an organization to reduce costs and establish spending consistency. But, consider the following drawbacks and you’ll understand why implementing a commission cap creates more problems than it solves:

It demotivates sales reps: A commission cap tells sales reps there’s a limit on how much they can earn, which demotivates them to go above and beyond to bring in the most revenue possible. As a rep approaches their commission cap, they’ll understandably put less effort into building out pipeline and closing deals.

Some companies establish an extremely high commission cap, thinking: “Reps will rarely or never hit that limit, but this protects us from overspending just in case they do.” But, even a seemingly unreachable commission cap has an adverse psychological effect on sales reps. Knowing there’s a ceiling on one’s earning potential is demotivating, no matter how high that ceiling is. Remember, it’s called an incentive plan for  reason, sales incentives are designed to motivate productive behavior.

It results in less overall revenue: Businesses implement commission caps with the hope of saving money, but often produce the opposite result. While a cap will reduce the organization’s commission expenses, it can also reduce the total amount of revenue being generated once sales reps no longer have an incentive to close more deals.

It encourages reps to “game the system”: Some sales reps react to a commission cap by simply becoming less productive. Others look for loopholes around the commission gap, the most popular method being to push a deal to the next pay period so they’ll receive commission for it. These tactics can seriously damage customer experience while ultimately doing nothing to improve the sales team’s cost-efficiency.

It puts companies at risk for high employee turnover: As stated above, most modern sales organizations don’t cap commissions. So, implementing a commission cap for the purpose of lowering costs will likely result in sales reps leaving the company for one that doesn’t limit their earning potential – meaning the organization loses some of their best reps and has to waste time and money on hiring new sales employees.

It makes it harder to hire new talent: Whether an organization wants to expand their team or needs to replace reps who are leaving, capping commission means they’ll face an uphill battle in the hiring market. High-quality candidates will likely have a number of options when searching for a new role – and if they have a choice, they won’t want to work for an employer that caps commission.