Sales Commission Plans Can Have a Negative Effect

man receiving sales commission plan cheque
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Does your Sales Commission Plan Motivate and Reward, or Dishearten Your Team?

Sales Commission Plans have long been a point of contention both within and outside the sales force for companies. Initially designed to reward performance, the reality for many companies is the commission is a disruption to the culture and performance of the sales team, particularly at the time of paying; many companies become at war with their sales team members.

I often see sales managers spending an inordinate amount of time debating the worthiness of commission plans to sales team members in individual situations. The salespeople’s position is they may consider their territory is subpar; they have limited opportunity to sign new accounts where commission rates are typically higher. There is a lack of support from the company to deliver the sales goals and be rewarded, along with a myriad of other perceived barriers.

The truth is that commission can sometimes be about luck where an individual has a territory that expands with the opening of new stores, providing them with immediately increased sales. The products and services are more suited to buyers in their territory vs. a territory on the other side of town.

The salesperson is not responsible for the revenue jump; they were just lucky that its new stores or sites landed in their territory. The alternative problem is when a territory loses a key customer when the shift to a new location and sales revenue falls; this is bad luck. The salesperson may leave the company as the quota is not attainable. This can cause significant disruption in your company’s sales culture.

For sales managers, the first challenge is not buying into making changes to the plan once it is instigated. Any changes will result in even more time spent discussing, negotiating, and refusing or making changes. The plan becomes more critical to the sales force than the results, particularly if it’s not going their way.

Then there are those that mistrust the company will deliver (pay-up) on the plan if they meet their sales goals. Some through prior experience and others become unnerved when changes, even minor ones, are made mid-year to the plan.

What started as a motivational plan quickly converts to a disheartening tool. Companies have lost great performers through inadequate plans and lowered productivity through disgruntled team members.

There are different structures to sales commissions and it will depend on the product and service, the sales cycle, and what high performers expect as their target earning OTE (on-target earnings). Rarely do you see straight commission only packages on offer except in the home renovation market. Most are a combination of base pay with a variable pay rate added over and above. Salary and commissions provide stability to top performers, particularly where the sales process is complex and happens over a period of time.

The sales organization must at all times consider the incentive plans to be fair and not just geared to the top sales performers. The more general reps earned in commission or incentives the fairer the plans are deemed by the teams. The goal of the plan is to motivate reps in all sales roles and not just a small handful of people.

Sales commission plans are serious and add to the top-line performance results. There are contributing factors to making sales commissions motivational for sales teams.

1. Cultural

Is the company committed to paying sales commissions? Does your company enjoy rewarding performance and celebrating the success of sales individuals? Paying commissions can be a cultural problem where the idea of sales commission is good, but at the time of paying, cash flows may be struggling, and the company looks for ways to minimise the funds due to individuals. Scrutiny of the plan is undertaken, looking for any loopholes to reduce payments with little to no benefit of the doubt to the recipient.

This usually starts with a poorly written plan, lack of guidelines, and conditions resulting in a fluid document that can be used for penalizing performers. It is a point of integrity. If loopholes exist, it is on the company to bear the cost, not the individuals. You can improve your plan in the following year, which leads to the next point.

2.  Plan Design & Documentation

The commission plan will determine the focus of the team and should be aligned to the company strategy and focus you wish the sales force to have in their activities.

Sales managers need to get commission plans right and fair for all those in their teams. They need to be well written with a clear sales commission structure and guidelines. Inclusions and exclusions are well set out, and terminology applied that is common to the organisation.

When designing a plan, sales managers need to consider and test different scenarios of performance and the repercussion those results will have on the plan and the individuals. A series of ‘What If’ need to be played over the plan to reduce loopholes and ensure no changes are made throughout the year. Using the last few years sales figures by individuals is an excellent place to start working through scenarios.

The plan must be signed off as complete and final by the required executives (CEO, CFO). The commission must be included in all budget forecasts. Forecasting the actual payouts is essential to finance departments.

3. Measurement

Plans need to be measured throughout the year and be reported on to the salespeople. They need to understand how their remuneration is being viewed by the company and understand where their performance is lacking.

The measurement must be focused on closed deals and not early milestone achievements. You are measuring total sales and in most cases gross margin commission.

A report following the end of the reporting period (quarterly/yearly) does not cut it and leaves the sales manager exposed to ongoing debates taking him/her away from their real priorities. Ideally, a measurement system that has a gameplay capability allowing salespeople to work their what-if scenarios and increase their earnings.

4. Earning commission training

Interestingly, many salespeople do not know how to earn a commission. Some companies think of this as a blessing, but they are only cutting their own hands by taking that stance. Sales managers need to spend time with their team members showing them how to improve their performance to be eligible for commission. Remember, the commission is designed to support the sales strategy!

This commission training is not about sales training – it is about activities that will contribute the right way to the plan. An excellent time for commission earning training is during monthly account reviews with each person.

If you can get these four factors right, you are on your way to having a motivating and rewarding sales compensation plan.

Designing plans correctly is crucial, and having the right plan to underpin your strategy is essential. The conditions of the plan need to be carefully worked out, and penalties minimised, showing the integrity and intent of the plan. The sales commission plan document must be communicated to all team members with no variations.

If you would like assistance in designing your sales compensation plan please reach out to discuss your specific business situation.

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© Y2020 Sales Focus Advisory All Rights Reserved

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About the Author: Adele Crane

A leader in Implementation Consulting.
2020 – Top 100 Magazine – Australian Business Professional. CEOs and Managing Directors have relied on Adele Crane to solve challenges with the performance of their sales and marketing since 1990. Her consulting experience in delivering results in 90-120 days is unprecedented by any other known sales and marketing consulting professional in the world. As an author of 3 acclaimed books, appearances on major media, and publications in USA, NZ and Australia, Adele’s experience brings fresh thinking and contemporary practices to business.