Design a commission plan that drives sales – Sales Commissions
Sandy Mathiesen
If you establish and oversee the commission package for your company’s sales force, you should consider numerous components to create a plan that both fairly compensates and adequately motivates the sales team. Ultimately, your plan should keep your salespeople happy while supporting and advancing company goals.
GROUND RULES
You will find that methods for creating a compensation plan vary widely and often reflect industry-specific standards. However, some ground rules cut across industries and they can provide a framework for establishing or reviewing your company’s sales incentive package. Some of the more important rules include:
* Start with the outcomes and behaviors you want to foster;
* Prioritize behaviors;
* Keep the incentives flexible so that they can evolve along with your company’s goals;
* Make the compensation plan easy for everyone to understand;
* Benchmark your competition to stay competitive; and
* Review regularly for relevance.
START WITH RESULTS
Of fundamental importance is to determine what results you want to encourage and to design your plan from there.
A sales team’s goals should reflect the company’s larger goals. Consider reprinting corporate goals in your sales agreements to underscore a unity of purpose. For additional clarity, you may want to include work objectives, even if they are not tied to commissions.
SOME CARROTS ARE LARGER THAN OTHERS
Every incentive in a commission plan is a carrot, but some carrots can be larger than others depending on the behavior they reward. Prioritize the behaviors you want from your sales force. You then can set up a system of rewards that encourages top-priority behavior, as well as motivates salespeople for situations that are clearly distinguishable.
For example, you may want to commission third-party products at a different rate. You also might consider commissioning services differently than products.
You can implement an accelerator plan, which provides flexibility in the commission percentage earned and paid. In this case salespeople are paid at a lower rate until they meet their target.
After that, they are compensated at a more accelerated rate for every dollar they generate in excess of the target.
KEEP IT SIMPLE
A commission plan needs to be easy for your sales team to understand. Not only do sales people need to see clearly what is motivating them, but you don’t want to spend your time haggling over commission payments.
Clearly identify how commissions are earned and keep the calculation formulas straightforward.
You can check your plan’s simplicity by creating a few sales scenarios and asking the sales team to derive the compensation. If the plan is easily understood, everyone should come up with the same numbers. If different figures are calculated, consider reworking the plan.
KNOW YOUR COMPETITION
If you want to retain a top-level sales force, your plan needs to be competitive. Gather intelligence on how your competitors compensate their sales professionals. You can figure out what commission levels are reasonable and competitive for your industry or profession through an Internet search at a source such as www.salary.com.
Human resource specialists in an industry often can help you locate surveys with compensation information; or sales professionals always know what their industry pays and can share documentation. You also can tap in to your industry’s professional association or ask your peers how they structure their commission contracts.
COMMISSION STRUCTURES
At the core of any incentive plan is determining what role commissions play in the overall sales compensation package. Four of the most common commission structures are:
* Commission only;
* Commission plus salary;
* Commission plus bonus; or
* Commission plus salary, plus bonus.
Although industry standards carry significant weight when creating a commission structure, ultimately your budget and priorities will determine how you pay sales professionals.
Again, when you hire sales professionals, they should immediately understand their earnings potential. For example, if you are paying commission only, you can specify that the commission will be X percent of the net sale, less any discounts. Or, you can define a base salary along with a target commission amount–the amount the salesperson would earn at 100 percent of quota. You might pay 50 percent base and 50 percent commission, or 80 percent salary and 20 percent commission.
If you pay bonuses, you’ll need to determine not only the percentage, but if they are based on company-wide goals, individual goals or both.
DIFFERENT PAY FOR DIFFERENT PEOPLE?
If multiple salespeople do the same job, their commission compensation should be equal. On the other hand, if job responsibilities really are different, these expectations should be spelled out and compensated for appropriately.
You might want to reward salespeople through higher base salaries for length of service, experience or stellar performance. Most importantly, be clear with your sales staff and apply any differences consistently.
FIRST-TIME VS. RECURRING SALES
You will need to address what commission is applicable to first-time sales as opposed to sales to repeat customers. By establishing higher commission percentages for new accounts, you encourage your sales team to bring in new customers.
But, you don’t want to discourage sales to existing customers, as this is a strong sign of customer satisfaction with the product. It may be better to pay equally, but to award a bonus to each salesperson who brings in X new customers in a given period.
TIMING OF COMMISSION PAYMENT
Your plan will need to specify when commissions are earned. Some options include payment at the time of invoicing or product shipment, when the customer payment is received or a combination thereof.
Paying full commission when a sale is invoiced or when a product ships has the inherent risk of paying out the salesperson on what may be a slow or nonpaying customer. To alleviate this risk, some companies pay commissions only after customer payment is received.
CONDITIONS-BASED PAYMENT
Another strategy is to pay 50 percent of the commission at the time of invoicing as long as certain conditions are met, with the remainder payable at cash collection.
You can put in the plan that anything uncollected for more than X-number of days past due will be removed from commissions, motivating salespeople to assist with collection follow up.
The “certain conditions” part of the commission agreement are for behaviors you want to encourage. For example, you might specify 50 percent commission payment for sales containing net 30-day payment terms. For sales with net 45-day terms, commission might be paid only when the cash comes in.
Another condition might be pricing in accordance with the internal discount guidelines. If salespeople get any additional discount approved beyond the guidelines, then you pay a proportionately penalized commission percentage, or pay only when the cash is received, or both.
Sandy Mathiesen, CPA, is a San Francisco Bay Area consultant. A former director of finance and director of sales operations, Mathiesen can be reach at smathiesen@yahoo.com.
COPYRIGHT 2002 California Society of Certified Public Accountants
COPYRIGHT 2002 Gale Group
