Uncapped Commission

We always uncapped sales commission for our sales reps. In one instance, it became a massive liability when the rep closed millions in revenue, but I'll tell you how you can protect yourself in these situations.

In this article, I'll explain why we uncap commission and why you should too.

• What is uncapped commission?
• Advantages of uncapped commission
• When to "cap" uncapped commission

What is uncapped commission?

Uncapped commission, or unlimited commission, means that sales reps earn commission no matter how much they close. It doesn’t matter if a rep closes $1,000 in sales or $1 million; they will still earn a sales commission. 

The other side of the coin is capped commission, where a company chooses to not pay further commissions after reps reach a certain value or amount of sales.

Here's an example of uncapped commission. Let's assume you pay your sales rep a fixed rate of 8% of the first year contract value. For simplicity sake, assume there are no accelerators or commission tiers.

• $100,000 in closed-won sales * 8% = $8,000 in commission
• $500,000 in closed-won sales * 8% = $40,000 in commission
• $10,000,000 in closed-won sales * 8% = $800,000 in commission
• And the amount can go up indefinitely... aka uncapped

Note this is why one of my mentors said, "if you want to make a lot of money, find the most expensive thing you can sell and sell a lot of it." You can see why this is true by the example above.

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Advantages of uncapped commission

There are a number of reasons that we use uncapped commissions in our sales compensation plans. Here are the key reasons:

• It motivates sales reps to keep selling past their quota, nailing their annual On-Target Earnings (OTE), and generally pushing sales through the pipeline as fast as they can.
• It’s not just about immediate revenue, but also long-term business development. A star rep may make a small sale upfront with a customer to get their foot in the door, only to sell that customer on a much larger contract after.
• The best sales talent wants to make a lot of money. Uncapped commission is a powerful selling point for recruiting the top sales reps.

The main issue with capping commissions is that reps have no reason to keep working on new deals once they have hit their commission limit. 

Thus, they might postpone engaging with leads until the next month or quarter when their cap is reset. Also known as sandbagging, which is bad for business.

Can you imagine a sales call like this: 

1. Customer: “We’re sold. We want to order 10,000 licenses immediately.”
2. Rep: “Sorry, I’ve hit my ceiling on commissions this month. You will have to wait until next month so I can get compensated for this deal.”

Now it doesn't go down like that, but it can be close to that. Sales reps find a way to make money within the constraints of their comp plans.

When to "cap" uncapped commission

A capped commission structure might make sense if a services-based company can only handle so many new customers in a given period, and they have no intention to expand operations. In this case, the rep may be offered a relatively high base, with commissions for hitting their quota but not for any further sales.

Where I see companies get into trouble and what we personally encountered is when big deals close contractually, but not all of the cash for the contract is received up front. So if you're not careful in how your comp plan is written, you may be on the hook to pay a large commission check, when you don't actually have the cash for it.

Make sure to include a few caveats in your uncapped commission plans.

1. Payout Clause: For amounts greater than $X, commission will be paid once payment is received from the customer.
2. Clawback Clause: If payment from customer is not received within Y days or cancels their contract, any commission paid becomes eligible for clawback.
3. Dispute Clause: Include a set period of time, which a sales rep is able to dispute a sales commission payment. You want to avoid any claims months or years later.
4. Management Clause: This commission plan may be changed by management at anytime.

If you want help designing your sales rep comp plan, take a look at my Sales Compensation Plan Template that I use for our B2B SaaS company. It's enabled us to clearly align sales rep incentives with our business goals, and be able to pay reps a lot of money along the way.