To be successful, commission schemes must be tailored to specific business needs and context
by Nigel Murphy, Consultant, Strategic Pay
The right sales commission scheme can be great for business. However, they’re not right for every organisation and poorly designed commission schemes can have unintended consequences.
It's vital you engage in the process of designing and testing a scheme – to ensure that it truly motivates your employees and actually benefits your business.
Why have a sales commission scheme in the first place?
Commission schemes are designed to motivate staff to sell more than they might otherwise, on the basis that the more they sell, the more they earn.
They tend to work well where additional sales do not incur additional costs for a company – where more sales simply means more profit. For instance, a retailer selling products off-the-shelf incurs no additional cost for each additional sale (save for the minimal cost of restocking). Here, more sales means more profit. So a commission scheme that incentivises more sales might work well.
Commission schemes typically work well in non-technical sales roles and where there are short lead-times. They work less well where additional sales generate additional company costs – or where more sales may not always mean more profit
For instance, a machinery manufacturer selling bulk products to order will need to consider manufacturing time, costs and lead time with each sale to ensure profitability. The business would need sales people who are concerned with both improving their numbers and the manufacturing cycle. Introducing a commission scheme in this type of business may risk sales people prioritising winning a deal over what’s actually good for business. A short-term incentive sales scheme would be far better here – incentivising sales as well as other measures of individual or company success such as overall profit.
What to consider when designing a sales commission scheme that motivates
As with all incentive schemes, organisations must recognise that there is no one-size-fits-all approach. To be successful, commission schemes must be tailored to specific business needs and context.
Commission schemes tend to be simpler than other types of incentive schemes. However, it is just as important to go through the same thorough process of preparation, design, testing, approval and implementation. All too often organisations skip through or miss these steps – only to encounter difficulties.
Stakeholder buy-in is also critical to success. Your employees should understand the scheme top-to-bottom. Those explaining it must be able to properly unpack it and answer any questions that employees raise. Consider whether your scheme could be explained in an elevator pitch. If it can't, it may be too complex.
Get started by asking yourself these key questions, and keep in mind what actions will motivate your employees in a way that also achieves business goals.
- How often will the scheme pay out? With a small retainer (or base salary), the scheme will need to pay out more often. Otherwise, living on a low income with occasional commission payouts would be very de-motivating to employees.
- What amount of commission do you give on each sale? 10% of a $10,000 sale (or $1,000) is far more motivating than 1% of a $10,000 sale (or $100).
- What is the expected sales frequency? 1% of a $10,000 sale may be motivating if making 1,000 sales per week.
- Do you increase the amount of commission when sales targets are exceeded – to motivate and reward those who achieve over and above expected sales performance?
- Do you cap potential earnings? If you do, is the scheme still competitive enough to motivate your team?
- What is the total earning potential of your sales people if they were to choose to work elsewhere, and how do their likely earnings with you compare?
How to address a sales commission scheme that isn't working
Overall, the success of a sales commission scheme is measured by how well it supports company strategy and objectives. All good incentive schemes should flow out of executive-level vision setting and strategic planning processes.
It is best practice to review your scheme on an annual basis, whether it's working well or not.
To review your sales commission scheme for effectiveness, you should start by asking questions like:
- Are the results as expected?
- Is it meeting expectations of all stakeholders?
- Were the targets too big, too small or just right?
A sales commission scheme that motivates requires discussion around key objectives and outcomes.
As with all incentive plans, commission schemes can experience problems in any number of ways and for any number of reasons:
- Unexpected costs.
- Unintended consequences.
- Unexpected employee behaviour.
- Manipulation or gaming of results.
- Unexpected windfalls.
- Lack of trust from employees.
- Lack of buy-in from management.
Identifying the problem and diagnosing the cause is just the first step. It is important to go through a process of re-designing and re-testing. You can test your scheme in a number of different ways - such as with a small group of employees, or by theoretically applying past results. This is a step a lot of people skip or neglect but it's important for diagnosing problems before they present.
Commission schemes tend to be less resource intensive to develop and administer than other types of schemes. In this way, they are an accessible tool for organisations of every size – both big and small.
