The Perfect Sales Commission Plan! Sorry, it doesn’t exist.
July 3rd, 2018
But these 10 guidelines can help you get close.
A few weeks ago, I met with the President and Senior Sales Executive for a firm in Dallas. They were looking for an objective assessment of their sales commission plan. Here’s what I told them…
After 30+ years in sales & marketing – and after seeing literally hundreds of different plans in a variety of industries – I can say, with ABSOLUTE CERTAINTY, that there is no one perfect sales commission structure.
Pick 10 companies at random – even from the same industry – and you’ll find 10 different (even wildly different) plans. Different companies, different products, different cost structures, different goals, different management systems, etc. all lead to different commission plans. Sorry… I wish I could tell you there was a silver bullet, but it just doesn’t exist.
However, there are a number of proven guidelines you should follow if you’re creating or updating a sales commission plan for your team.
But first, you need to understand the objective behind paying commissions. It’s not what you think.
The reason you pay commissions is not to reward success (as nearly everyone thinks)… the real reason behind paying commissions is to drive the behavior you want from your salespeople.
Here’s an overly simple example to explain…. Suppose you sell two products: A & B. ‘A’ sells for $50 and has a 30% margin. ‘B’ also sells for $50 but has an 60% margin. Since your reps are paid a percentage of sales, they don’t really care which one they sell. But you do!
So, to steer their behavior to the outcome you want, you create a new commission plan. Your reps earn a 5% commission on product A, but now a 10% commission on B. Which one do you think they’ll want to sell?
Remember to keep in mind the behavior you want to see exhibited and create the plan that will make that happen. To do that, here are 10 guidelines to help frame your new sales commission plan:
- Commissions should be paid on revenue, not profit, especially if the reps are not involved in setting the price. In fact, I would strongly suggest sales reps not be involved in pricing.
- Commissions should be paid when the client is invoiced. Your reps should not be paid on or involved in ‘collections.’
- Pay commissions monthly. Good salespeople crave ‘instant gratification’ (and monthly is about as ‘instant’ as you can get in MR).
- Assuming you’re paying under a ‘salary + commission’ plan (which 90% of firms do), commissions should not kick-in until their sales cover their salary. Think of it as a minimum sales goal.
- Speaking of sales goals (and the ‘behavior’ we alluded to earlier), sales goals can be set a number of ways… a general percentage increase, by client, by service line, by industry vertical, etc. Don’t just pick a plug number and use that as the sales goals – work with each rep to determine a goal that is fair, but also a bit of a stretch. Set it too high, and the reps will give up on Day 1. Set it too low, and you’re just giving away money.
- Include an escalator. That is, the more a rep sells, the higher percentage commission they earn.
- No caps! Don’t limit the potential earnings of your sales reps. In fact, sales people should be among the highest compensated people in your firm… because if they’re making money, then so is everyone else.
- Make it simple (part 1): If a sales rep needs more than few seconds to figure out his/her potential commission on a project, then your plan is too complicated.
- Make it simple (part 2): If it takes you more than a couple of minutes to plug some numbers into a spreadsheet and calculate the payouts, then your plan is too complicated.
- Finally, nothing is forever. Review and assess your sales commission plan every year… and if it’s not working for you – or your reps – then change it.
A good sales commission plan should be a WIN-WIN… good for the sales reps and good for the company.
What did I miss? Are there any other guidelines you’d include when creating or updating a sales commission plan? Please share your thoughts…
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