Sales commissions – how to make it work in your business

Do sales commissions help or hinder your sales results?

Should your sales team get commission on what they sell?
Should you offer a commission at all?
What is the best way to reward and incentivise your sales team?

These are important questions for any business owner to ask.

Selling can be a tough activity

Effective sales people need to have strong self-esteem, strong self-discipline, strong self-awareness, as well as advanced communication skills and high Emotional Intelligence. That’s why sales isn’t a job for everybody.

Due to the inherent high-intensity of the sales profession – always in contact with prospects or customers, always being ‘on show’, always trying to manage forward momentum in the sales process, and often being judged in a black-or-white manner (either you get the sale or you don’t!) – sales people operate under a fair amount of pressure and usually respond well to some form of incentive, reward or recognition.

And we’re not just talking about the stereotypical road-warrior type of sales person. These days many people who have responsibility for generating revenue (a sales role) are not in traditional full-time sales position. For example they may be:

Professionals who need to win over new clients or new pieces of work
Technical experts who have to ‘sell’ new projects or capabilities to clients
Inside sales people who operate from an office winning business from clients remotely via phone, email and online communications
Managers who also have client account responsibilities

Expectations evolve over time

But times change, and expectations of some sales people change. It has been well documented that the GenY/Millennial age group has a stronger preference for ‘being part of something bigger’ than older age groups. For them it’s not just about the money. Autonomy and personal growth are highly rated by them.

The expectation of competition versus collaboration with colleagues has also evolved. The dog-eat-dog world of 1970’s sales that pushed sales teams to compete within the team has morphed into a more cooperative, bigger picture, team-based environment.

Many modern businesses, such as SaaS (software as a service) firms, encourage collaboration across the sales team, with incentives structured so that there is a focus on “what happens next” in the sales process and a team-based achievement mindset. A combination of individual KPI’s and group rewards is often the norm.

Sales commissions have a purpose

When structured and applied correctly sales commissions – also referred to as a ‘sales compensation plan’ – can help increase revenue and/or profitability. Commissions can focus attention on achieving specific sales goals. It’s the classic carrot out of the carrot-and-stick approach. If I achieve X (the sales goal) I will receive Y (the commission/carrot).

Commission doesn’t have to be cash

Importantly, what I refer to here as ‘sales commission’ doesn’t always need to be a cash payment, although it is often seen as that. The objective of offering a commission is to reward sales staff for achieving predetermined goals. Any type of reward could be included as part of the sales commission plan. The key is to offer a reward that is desired by your team – getting them to motivate themselves, increase their focus and modify their sales behaviours.

However if you are looking at a commission scheme for your business you should be aware of the benefits and pitfalls of paying commission, as well as some do’s and dont’s to ensure a commission plan works for your business.

The benefits of sales commissions

To motivate individual sellers to achieve their quota/KPI’s
To focus on sales of particular product/service
To encourage sales to be booked across other time periods
To launch/relaunch specific products
To motivate the team to do the hard stuff within their sales role which non-sales people are not expected to do
To protect profitability by rewarding sales at certain price points

The pitfalls of sales commissions

May encourage a destructive competitiveness (selfishness) within the team
Sellers may ignore products/services not subject to commission
May encourage sellers to ‘push’ products without due regard for the customers interests
May be unsustainable/disappointing if not structure correctly
Could create resentment from non-sales staff because they don’t get commission
May encourage sales team to pressure other staff to meet deadlines or not follow standard procedure in order to win the sale for the sake of their commission

The cost and impact of sales commissions

It’s also important to consider the cost and impact of sales commissions within the business. It can be relatively easy to come up with a commission plan (or could be quite complex). But it’s usually a lot harder to think the whole plan through and assess the impact on the business.

Assuming the commission scheme works to focus sales efforts on particular product or service lines, or to achieve a certain level of pricing/profitability, or to attract more of a certain type of customer, what will the ultimate impact be on the business. Can you handle it? Can you afford it?

Allowing for the cost of sales commissions

Has the commission value been factored into margin calculation?
Has payment of commission been allowed for in cash flow?
When will the commission cut out or reduce (sliding scale)?
How much do you expect a seller to earn? Is the commission capped or unlimited?
Will commission be paid upon receipt of order or upon delivery?

Allowing for the impact of sales commissions

Will the commission plan affect production/service levels?
Do you have the capacity to handle extra sales generated as a result of paying commission?
Who will be doing the analytical work (crunching numbers) to report on it?
Communication will be required to implement and also manage the commission scheme within the sales team – who will be doing that and when will it happen?
Will there be additional pressure placed upon logistics/delivery team to meet the promises made by the sales team?

Doing projections based on “what if?” scenarios can be extremely useful to assess the financial impact of various sales commission schemes. If you are working with a modern accountant who uses online accounting tools (like we do for clients) it can be easy to run forecasts on multiple scenarios to determine the likely impact on margins and cash flow.

Do’s and dont’s for implementing a sales commission scheme

Keep it simple to calculate
Ensure the commission reflects the activities you want the sales team to focus on
Have a sales threshold under which commission is not payable (often called a ‘floor’); this is the minimum performance expected
Put it in writing
Regularly monitor and report on commission accrued
Pay it on time
Offer options within the sales commission scheme; some people may value other types of reward
Provide positive recognition for every team member who earns commission; don’t just leave it as a purely monetary reward
Regard discussions about the commission plan as a valuable sales coaching opportunity – hold sellers accountable

Don’t

Begrudge paying the commission or treat it as a favour to the team member (if it has been earned you should be happy to pay it)
Put a cap on commission earnings (often called a ‘ceiling’); this will demotivate your top sellers
Keep changing the commission structure; changes should be made at most once per year
Make it so confusing nobody can explain it
Include a claw-back policy (where the seller has to pay back some commission) unless it is only for negligence on the part of the employee
Forget about it; let your team know the commission scheme is part of the company plan and is being actively monitored and managed

Encouraging, motivating and supporting your sales, professional, or technical team to achieve their revenue goals is critical for every business. If you need help to consider your sales commission options or sales team structure please contact us for a complimentary initial consultation where we can discuss your situation.

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