Should you cap commissions?

A question we get frequently from startup founders is should they cap commissions for their sales team? The reason they ask this question is because they get the financials we prepare at Kruze, and they are startled that the VP of Sales or a top salesperson is making more money than anyone else in the company. And that can be a shock when the CEO or COO finds out that another employee is making more than they are. However, capping sales commissions can seriously impact your company’s growth.

Commission caps can backfire

While capping commissions may seem cost-effective at first glance, it could actually be less profitable in the long run. Some reasons why include:

  • Caps de-motivate your sales force. Salespeople tend to be very financially focused. Think about it – if you’re not allowing your sales team to reach their full potential, they don’t have any incentive to keep performing. Once a salesperson reaches the cap, he or she might as well stop there. You want your salespeople to have big commission checks if they’re signing deals. Compensation and sales performance are two sides of the same coin.
  • Capped commissions let lower-performing salespeople “catch up” to the top performers. Professional salespeople are very competitive, and that’s exactly what you want. You don’t want someone who’s okay with losing sales to be a salesperson for your startup. Good salespeople aren’t just about the money – closing deals are a way to keep score. And you want to encourage that competitive attitude.
  • Caps can cause your startup to earn less revenue. This is related to the first point, but it’s important from a business standpoint. A commission cap will lower your compensation expenses, but it means you’re probably going to earn less revenue because you’re putting a limit on performance.
  • Caps encourage salesperson turnover. For any business, competitive pay is essential for success. Commission caps simply encourage sales staff to explore other opportunities to make more money. There’s a strong relationship between performance and tenure. You risk losing experienced sales reps to competitors that pay more.

You want your salespeople to make a lot of money. In fact, it’s a sign of a thriving company if the sales team is very well compensated.

Flip the script

An effective alternative to commission caps is the concept of accelerators. So rather than capping, you’re doing the exact opposite. With accelerators, the more a salesperson closes, or a sales team closes in a quarter or a year, they can pick up accelerators, and actually get higher commission levels as they surpass their quotas.

As an example, maybe the sales team gets a 5% commission on all sales they do up to their quotas, but then after they exceed their quotas, they get 8%. That’s a 60% increase on every sale, which will be highly motivating for people on the sales team, so they hit their quotas and then keep going.

So we definitely don’t recommend capping sales commissions. Instead, you should probably look at accelerators. You’re building a startup. You want to be successful. Paying your salespeople well is going to help you accomplish that.

If you have any other questions on startup accounting or taxes, please contact us. You can also follow our YouTube channel and our blog for information about accounting, finance, HR, and taxes for startups!