Jean Williams and Nick Woodward from Hewitt CSi look at remuneration for sales staff and reveal how a well designed sales commission plan can add to the bottom line results of an organisation

Structuring the salary packages of salespeople in a way that maximises sales is an important factor in the success of any business. 'What gets measured, gets done - what gets measured and rewarded gets done even better'. This is the consistent mantra underpinning all variable reward programs, with sales commissions being perhaps the most transparent and highly visible of these plans.

Commission plans vs other variable pay plans
As you start to consider your commission plan, what you want to achieve and what you are going to measure, it is important to keep in mind the underlying definition of what constitutes a commission plan. 

Commission is a type of variable pay where the participant knows their sales target and how much they will get if they reach their sales target. Both are communicated at the start of the measurement period. 

A variable pay plan that distributes a proportion of the profit at the end of the year is not a commission plan because generally the recipients don't know at the start how much they will be getting. That is a bonus plan. 

A variable pay plan that measures performance against non-sales objectives or KPI's, regardless of whether or not the value is communicated at the beginning of the period is also not a sales commission plan. That is an incentive plan.

Variable pay plan examples
The table below illustrates how the types of plans differ for an employee on $90,000 with a variable pay target of $10,000.

A sales commission plan will link a financial reward directly to desired sales outcomes, so assuming a sufficiently attractive reward is on offer, the sales commission plan will directly impact sales behaviour.

Types of sales commissions
There are two main categories of commissions; those that use a target rate and those that use target pay. Target rate is where a fixed percentage of the sale is paid to the salesperson while target pay is where a commission is calculated so that the participant reaches a target level of remuneration once a sales target is met. 

Target rate is best applied where the sales person is also the source of the income, for example a real estate agent or a mortgage broker. Target pay is used where the income is generated from the organisation's product/service such as a sales representative for an IT vendor. Approximately 95% of sales roles fall into the second category so the scenarios discussed here will focus on target pay.

Target pay for a sales representative
Let's take the case of a sales representative, Dave, selling a relatively transactional product - enterprise servers.

Dave's annual total remuneration is $150,000, comprised of $90,000 fixed remuneration and $60,000 annual on-target commission.

Utilising market survey data from a provider such as Hewitt CSi, Dave's employer is able to ensure his total remuneration, assuming targets are met, is positioned at the 75th percentile of the external market for this role. The split of 60%:40% between fixed and variable remuneration is in line with the organisation's standard policy for this 'hunter' style role. 

Dave has an annual sales target of $4,000,000, with commission paid quarterly. 

At the end of each quarter, Dave's commission will be calculated by measuring his actual sales against his quarterly target ($1,000,000) and applying this to his quarterly on-target commission ($15,000).

For example, in the case below, assuming Dave sells $900,000 of product for the quarter, (90% of his target figure), Dave will receive 90% of his target commission ($13,500).

Structuring sales commission plans
Of course, the above example is a simplistic model. There are a number of levers or variations that are typically added to such models in the 'real world' to a) increase motivational impact to the successful salesperson and b) balance business realities with the need to reward successful sales employees. 

The graph below helps to illustrate some of these levers.

Setting a baseline for minimum performance level
Hurdles (floors/thresholds) indicate that a minimum performance level must be reached in the given performance period before any commission is paid to an employee. These are in place so that no commission is paid to low performers. Hopefully very few salespeople fall into this category and the business can spend more time worrying about the issue of rewarding its overachievers!

Rewarding over-achievement of sales targets
This brings us to the more exciting aspect of sales commissions - what to do when a salesperson exceeds their targets. What is the 'up-side' for the employee?

The accelerator is the most common method applied. Put simply, the rate of commission paid is accelerated for every dollar earned above target. This encourages the employee to not only meet their targets, but to 'smash their targets'! In some organisations, protection exists against seasonal fluctuations by holding back accelerated payments until the end of the financial year before delivering to the employee in the form of an end-of-year 'kicker' or 'top-up' payment. 

Capping the cost of over-achievement of sales targets
Organisations may then apply decelerators or caps that apply once an employee meets a particular level of overachievement. Whilst protecting a business against poor budget setting, caps are known to act as a demotivator to overachieving salespeople, who strive for the 'dream deal'. Rather than applying a cap, it may be more appropriate to have a windfall clause, some guiding principles about how commissions may be managed to protect the organisation from unexpected scenarios such as a change in legislation that brings a flood of new business.

Other levers and variations that may be applied dependent on business strategy, sales cycle and product type include weighted plans, trailing commissions for multi-year deals, incorporation of non-financial measures, team targets and one-off bonuses. The end of year 'top seller's' club remains a feature of many organisations' salesforces, with lavish reward trips for high achievers still a common method of promoting friendly competition amongst the sales team.  

Checklist for constructing a successful sales commission plan
There are two main pitfalls in constructing a commission plan. The first is to set targets on factors that cannot be measured. The other is to construct a commission plan that is too complex. Here is a quick checklist to ensure you haven't 'overcooked the detail':

1. Can I measure everything that needs to be measured for the plan to work? For example, profit on a service is difficult to measure and often not known until the end of the project. 

2. Do I have any measure that is worth less than 15% of the commission payment? 15% is not generally seen as valuable enough to be motivating. 

3. How different are my plans for the different roles? The plan shouldn't differ greatly from role to role. For example, if reaching a revenue target is the aim, then that should be reflected for all roles participating in the commission plan. 

4. Is my commission plan overlapping with other variable pay plans? Commission plans reward performance against pre-communicated sales targets or quotas. The tools to direct how work is done or to reward performance of salespeople in non-sales activities are an incentive plan and a good sales manager.

5. Is my plan too complicated? To break this down check that:
 * The salesperson can work out the end result
 * There are not more subclauses than main clauses
 * It doesn't take an unreasonable amount of time to administer each month
 * There are no more than three levers or variations

Like any variable pay scheme, a well designed sales commission plan can have a considerable impact on an organisation's bottom line. To ensure it continues to support the overall business objectives of the organisation, it should be reviewed at least annually to maintain and enhance the crucial linkage to business strategy.