Unlimited income? Sounds good in theory but has a lot of cons as well. Discover how uncapped sales commissions work in the world of sales compensation.
Sales commissions are an essential form of variable pay for sales roles, which is a simpler way of saying that most sales reps are in it for the commissions (lol).
The higher the commission rates and on-target earnings, the higher the incentive to make more sales (Usually). Following this logic, the concept of uncapped commissions is born.
Some companies apply a limiter or a gate to the maximum amount salespeople can earn as commissions, but commission structures with uncapped commissions allow sales reps to earn commissions for every sale they make, no matter how much they exceed their quota. For top-tier sales professionals, this is as good as a gold mine.
Uncapped commissions allow for higher levels of incentivization, but may not be the best for both parties. In this blog, we will explore the concept of uncapped commission structures and how they are used.
What is an Uncapped Commission?
Uncapped commission refers to the potential for sales reps to earn unlimited commissions as they sell more and more because of no limit imposed on the maximum amount they can earn in commissions, hence the term 'uncapped'.
Some companies impose limits to the maximum commission that can be earned by capping the quota limit till commissions are earned. For example, a 5% commission rate up to 100% quota achievement, and 8% up to 150% quota achievement beyond which there are no commissions.
Uncapped commissions ensure that there is ample motivation for sales reps to push past their targets, resulting in more revenue for the company.
Why Uncapped Commissions May Be A Red Flag
The thing is, most companies do not cap commissions by default. A company purposely advertising uncapped commissions in the job description may signal other bad practices going on which are being covered under the guise of 'unlimited commissions'. A company should always be able to tell how many of its reps are able to meet and exceed quota, since long sales cycles, complex deals, and impossible quotas might make it impossible to reach the 'standard' of earnings that have been advertised.
OTE presents a better picture of sales compensation—the fixed base salary and target commissions, along with data on the percentage of reps who can normally reach the quota in a pay period. It is better to be in a company where commissions are capped at 150% of the quota but achievable than in a company where commissions are uncapped but reaching quota is impossible, so the 'unlimited' commissions are redundant.
Here is the minimum information any aspiring sales rep should have before joining a company:
What the target variable is (total target commission at 100% quota)
What percentage of reps can meet quota in a pay period
The sales cycle length, sales process, and KPIs expected
Advantages of Uncapped Commissions
Uncapped commissions can create a very effective compensation structure fueling fierce motivation and creating a strong retention mechanism for top performers, leading to high revenue growth and low rep turnover. Here are the advantages of uncapped commissions:
Unlimited Earning Potential: Unlimited financial incentives are an effective way to boost motivation in sales professionals. They provide unlimited earning potential for top performers, motivating exceptional effort and results.
Goal Alignment: Creates direct alignment between company success and employee compensation, especially in sales roles- leading to high revenue growth due to fierce motivation.
Employee Retention: Attracts and retains high-performing talent who are confident in their abilities by providing them infinite room to grow their paychecks.
Encourages Personal Growth: Limitless earning potentialencourages employees to continuously improve their skills to close more deals and expand their customer base.
Disadvantages of Uncapped Commissions
As with most cases, there is another side of the coin in the case of uncapped commission works. They may cause cash flow issues, raise questions on fairness in compensation, and cause unethical practices for closing deals quickly to increase paychecks. Here are a few of the disadvantages of uncapped commissions:
Cash Flow Issues: Uncapped commissions may lead to unsustainable compensation costs if multiple employees significantly exceed targets. An uncapped commission strategy can lead to ignored budgets, uncontrolled expenses in certain pay periods, etc.
Unethical Sales Practices: Can incentivize aggressive or unethical sales tactics if not properly structured with quality controls as the unlimited earnings potential can make sales reps try to close as many deals as possible without analyzing their quality properly.
Unhealthy Internal Stresses: An uncapped commission structure encourages high pay disparity between star performers and other normal performers which might create unhealthy internal competition or discourage teamwork.
High-Income Volatility: Such sales commission structures often result in high-income volatility for employees, potentially affecting their financial stability and leading to disappointment if their high expectations are not met.
Capped vs. Uncapped Commissions
Wrapping Up
Sales commissions have always been hard to get right, and more than ever before, sales comp needs flexibility and adaptability to market conditions. Sales commission software help organizations be responsive to market changes, team changes, etc. The biggest benefit is perhaps the increase in the visibility of commission earnings on the reps' side. Automation makes sales commissions more effective by effectively displaying how much a rep is making on each deal in real time.
Visdum is a sales compensation software designed to be easy to use and fully automates the sales compensation process with multiple integrations to data sources, intuitive visual dashboards for commission and sales performance tracking, and dedicated customer support to handle all your sales compensation needs.
FAQs
What does uncapped commission mean?
Uncapped commission means that in roles where commissions are also part of compensation, such as sales, there is no limiter or cap put on the amount an employee may earn in commissions, which in theory means that the employee can unlimited commissions if they keep achieving their targets (e.g. keep making sales in sales roles).
How much can you make with an uncapped commission?
The main benefit of uncapped commissions is that a sales rep can earn commissions as long as they keep making sales, no matter how much they sell, which can result in a large sum of money and a limitless earning potential if a sales rep were to close a lot of deals. On top of that, tiered commission plans often increase the commission rate after 100% quota achievement, which means the commission earnings above quota are even higher.
What does capped commission mean?
Capped commissions refer to a limit on the amount of money that sales reps can make from sales commissions. Some companies implement a commission cap (usually at 150% to 200% of quota) to control compensation costs and also to deter any malpractices that may be borne out of the motivation from unlimited earning potential.
What are the cons of uncapped commission?
Uncapped commissions encourage fast closures and careless qualification of prospects, which may damage customer quality and increase churn. Similarly, they may result in inconsistent earnings in the sales team, which causes unhealthy internal rivalry and hurts team collaboration.
Are 100% commission jobs legal?
Yes, although 100% commission jobs are legal, employers must ensure that the compensation plan is viable to meet the minimum wage requirements mandated by law.
Why would a company put a cap on commissions?
Companies put a cap on commissions to control compensation costs, promote consistent earnings, and ensure that salesmen don't run out of motivation after periods of excessively high earnings.
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