How to set sales commissions

The answers to six common questions about building a successful sales compensation plan

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BY JAMIE SCARBOROUGH

There are many great reasons to be in sales as opposed to, say, HR or marketing. None are as compelling as the commission plan. Of all the roles in a company, sales people are the employees whose financial rewards are most closely tied to their individual performance. Despite having lower base salaries than most of their colleagues in other departments, a company’s highest paid non-executive employees are almost always in sales.

Building a commission plan is tricky. At its best, it will inspire, direct and retain your strongest performers. At its worst, it will encourage laziness and lead to disengagement. Here are the answers to six common questions employers have when building commission structures.

1. Can I pay 100% commission and no salary?

Most employers would love to lower the financial risk of a sales hire by recruiting people exclusively on commission. Some companies are even really successful at it. The challenge is that good sales people don’t need to take commission-only roles, because there are other employers who will pay them a good salary and good commissions.

While your goal should always be to hire the best in the market, 100% commission roles attract candidates who—because of lack of skill, a spotty resume, or minimal experience—have little other choice. The occasional hire will work out well, but most will leave you frustrated by poor or inconsistent results.

2. What percentage of the total compensation should commissions cover?

The most effective sales compensation plans will typically have approximately 50–80% of “on-target income” (the amount of total income that should be earned if the sales person meets the basic goals of their job) guaranteed in the form of a salary, with the remaining 20–50% coming as performance-based bonuses or commissions.

The more a rep can impact their territory’s results, the more commissions should be in-play. As such, a new business development role will often be closer to 50/50, while an account manager will be closer to 80% salary.

3. What should commissions be based on?

In our research, commissions do not drive a person to work harder—hard working people consistently push themselves, and lazy people consistently struggle to stay motivated. You should be picking between hard-working and lazy candidates pre-hire, not relying on a juicy commission structure to rev someone’s engine.

Instead, think of commissions as a way to direct behaviour. If you want someone to focus exclusively on new business development, then why give them commission on account renewals? If you want them to grow accounts year-over-year, focus the commissions on revenue increases. But be sure to avoid paying commissions on something that the person cannot clearly control or influence greatly.

4. When should commissions or bonuses be paid out?

Many companies choose to pay an annual bonus at the end of each year. The theory being that an annual bonus creates the most stickiness with their employees—most people will turn down other job offers to collect on their $40k bonus a few months away.

But an annual structure creates problems. Employees find it extremely hard to live 11 months of the year on a salary alone, and will often cite “more consistent monthly income” as a main driver to move employers. Equally concerning is that if all your commission payout timeline incentivizes sales people only to leave at the end of each year once their bonus has been collected, you are risking a mass exodus going into the new year.

Commissions and bonuses should be paid out on a monthly or quarterly basis, with an annual incentive (either a consistency bonus or reward trip) to encourage retention.

5. How can I financially encourage more new business-development from my territory managers?

While paying higher commissions on net new business (as opposed to renewals) seems a logical solution to drive more hunting behaviour, it can be hard to manage from an accounting perspective and—in worst case scenarios—can lead to poor customer retention habits. It is a bad strategy to bring on new clients at the expense of your existing and proven ones.

Many companies now completely separate new business development from existing account management. If your business requires the same person to do both, try to use a monthly/quarterly/annual sales quota to force new business development habits and encourage strong account renewals.

6. Should commissions be capped?

No. Never. Nothing de-motivates your sales employee more than not getting paid on a deal. Think of it this way: Would you ever cap your company’s revenue

***The most important thing to remember is to not make a commission structure too complicated. If your rep can’t quickly figure out what they are going to make on each deal they close, you likely are missing a big opportunity to create a closer connection between their results and their pay packet. For the love of sales! ***

View this article on PROFITGuide.com.