How to design effective sales compensation and sales commission plans.
Sales commission is cited as the primary motivator for taking a selling job.
Where the performance element of pay is 30% or more, behaviour is predominantly shaped by the performance element of a sales commission plan.
Commission based sales incentives give staff what they want - a sense of control over their own destiny and non-judgmental performance feedback. Should we be surprised when they act in accordance with their plan and personal needs, rather than in response to management directives?
Incentives are often initially based on simple principles. Then over time, as circumstances and objectives change or unwanted side effects are discovered, modifications make commission plans more complicated.
Instructing salespeople to focus on services has little effect if most of their compensation depends on selling product.
Quick fixes in the form of special incentive payments can make the situation worse, as they did at one company I worked for. The extra sales incentives were intended to increase attention on low-end high volume products. This worked so well that most of the team overachieved and benefited from the accelerators. The unanticipated combined affect pushed payroll costs way over budget.
Many variables effect seller behaviour and motivation. The mix of base salary and performance pay, the measurement period, when sales commission is paid, the method of measurement, accelerators, how high the ‘on target’ bar is set, and capping, all play a part.
Inconsistent levels of payment for different products and services ads a further layer of complexity. Commission plan design and incentive compensation management warrants a great deal more attention than it usually gets.
Everyone has a different profile for motivation so no uniform sales compensation plan can have an optimum motivational affect for all individuals.
Uniform plans that deliver a consistent sales commission calculation are at best an unhappy compromise. These days, automated compensation management tools makes it possible to design a compensation plan that takes into account each individual salesperson's personality and intrinsic motivators. Let's consider the variables.
Mix of Base Salary to Performance Pay
Attention swings towards winning immediate business as the ratio of performance based compensation to salary increases. Aggressive accelerators accentuate the urgency of meeting or exceeding every target. Most sellers motivated this way will behave like water and always find the quickest root down the hill.
Opportunity for gain concentrates the mind. Longer-term considerations such as new market development and even new products may be ignored unless they generate clear upside earning potential.
Advocating team behaviour under these circumstances is like trying to push water up hill. High base salaries with small commission elements encourage long-term focus and good corporate citizen behaviour. Relationships and reputation are better maintained. Strategic opportunities receive more attention.
In my first selling job, bonus payments based on company performance and individual salary provided team oriented motivation. Salespeople were more inclined to visit customers who had no immediate business to place. In larger companies, this approach can direct attention away from profit and revenue milestones towards being seen to do the right thing.
The Measurement Period
Orders tend to bunch up at the end of measurement periods. Sellers naturally focus on the business at hand and neglect prospecting. Pressure to close business in time for measurement period end dates, pushes pipeline work into second place.
Countering this with monthly or weekly targets leads to lower value orders as attention increasingly shifts to opportunities with shorter sales cycles.
Quarterly, half-yearly or annual measurement periods tend to result in long famines and larger orders.
Activity targets, that are designed to improve order flow yet are left subordinate to the compensation plan, are largely ignored or receive lip service. Attaching payments to activity targets may encourage manipulation.
When Commission is Paid
Paying sales commission against orders causes staff to move quickly on to their next opportunity and reduces their interest in delivery and implementation.
Deferring payment until the customer pays, disconnects success from the reward, devaluing the commission scheme.
With some schemes, the commission associated with a sale may not be paid for six months or more. In my early days at Sun Microsystems, many of us spent a disproportionate amount of time checking indecipherable commission statements and querying pay cheques. We also became involved in debt collection. As you might expect, such circumstances work against the purpose of sales commission plans. Happily, for us and Sun, the scheme was improved.
The Measurement Method
Basing performance compensation on profit, steers staff to sell whatever products or services have the highest margin, regardless of management intent. For resellers and distributors this has the advantage of providing automatic feedback of market preferences and opportunities. It also helps control costs. Yet focussing compensation plans on profit can frustrate marketing strategy.
Paying commission on revenue reduces interest in the price paid and helps the pursuit of market share and strategic customers. On the down side, profit margins become more difficult to control.
Changing the value of commission according to performance spurs salespeople on to greater effort when the effected number is perceived to be in reach or achieved. This may result in more price pressure from the salesperson, so that he or she can buy business forward.
Accelerators can also encourage sandbagging. If a salesperson thinks the target associated with the accelerated commission rate is out of reach, he or she is likely to sandbag to preserve orders for the next measurement period.
Overall accelerators increase motivation, business, and earnings. Accelerators are difficult to budget for If more than the expected proportion of a team achieve accelerated commission.
Clear goals, careful consideration, consultation, and testing are essential for designing all but the simplest sales compensation plans.
If the task falls to you, adopt a cynical mood and imagine you are a recipient. Think through how the planned scheme or changes will effect your earnings and actions. Ask peers to do the same. Get some of your salespeople to give you feedback. Ask your accountant or financial director to pick holes in envisioned schemes before they are published.
Repairing mistakes after a sales compensation plan is issued is almost always expensive. Target commitments will have been based on the published compensation plan. If adjustments could mean less money, they will have a de-motivating effect.
Effort invested in planning pays dividends in results and reduced need for management intervention. Whenever sales incentives or sales commission plans need revision, remember the 1 – 10 – 100 rule. Right first time costs once. Right second time costs ten times. Right third time costs one hundred times.
Jeffrey Pfeffer of Stanford University’s Graduate School of Business extols the wisdom of not tampering with pay systems. On the whole this is sound advice. In the case of sales commission plans, it is seldom possible to follow. Better to use a compensation management system that facilitates a flexible approach.
Article by Clive Miller
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