At Sales Cookie, my job is to automate commissions for our customers. So far, I’ve reviewed hundreds of sales commission structures. Over time, I’ve learned to recognize highly functional vs. problematic incentive programs.
Some of the commision structures which cross my desk are very successful and fuel fast business expansion. Others include endless layers of complexity which confuse reps without any clear benefit.
Do you feel that your commission program is EXCITING? Or is it merely another complex tax on your business? Here is what I’ve learned about successful commission structures from some of the world’s fastest growing sales organizations.
- Their commission structures promote clear sales behaviors
- They’ve managed to eliminate commission “roller coasters”
- They always pay commissions accurately and on time
- They keep their commissions exciting through personalization
Test #1 – Does Your Commission Structure Promote Clear Sales Behaviors?
To motivate reps, we must first analyze the process by which reps evaluate their potential payouts and take action. For example, let’s say you have a per-product commission rate table. Product A comes with an 8% commission while product B comes with a 9% commission. Let’s say there is an additional 1% kicker for meeting quota as well. Seems pretty reasonable and quite straightforward in terms of structure!
However, your reps will wonder why product A only comes with an 8% commission when product B comes with a 9% commission. Where did these percentages come from? Who made the decision? Was it the VP of sales or finance? Are these rates negotiable? Are these rates fair? Are they competitive? Are they the same for everybody? Do they represent some secret margin calculation?
More importantly, are your reps really going to check their rate table to decide which product to sell? Since the upside is only an extra 1%, will they find it their worth putting in more effort to sell product B instead of product A? The answer is no. They’ll sell what they can, and what customers want. This type of commission structure is designed to contain costs. It doesn’t do much in terms of promoting specific sales behaviors.
On the other hand, a commission structure which pays a $100 for closing 3 deals, $500 for closing 7 deals, and $2000 for closing 12 deals does promote a clear sales behavior – i.e. don’t worry about the amount, and close as many deals as possible. Obviously, this may not be what your business needs, but it’s a good example of a commission structure showing clear intent.
My recommendation is to pick a few critical sales goals, and make sure your commissions communicate a corresponding intent. Put yourself in your reps’ shoes and ask yourself a few questions. Which specific actions will allow me to increase my commissions? Is the extra commission worth the extra effort? If the answer is clear, then you’ve probably nailed it.
Test #2 – Does Your Structure Avoid Commission Roller Coasters?
When it comes to commissions, things can feel a bit like a roller coaster:
- What? You’re increasing my quota because I’ve done well?
- Yeah! Our main competitor has just gone out of business!
- Oops! Those product issues are going to hurt my sales.
- Why did you decide to split my territory into two?
- Wow! Amazon just told me they want to buy ASAP.
- Damn! I wasn’t able to close this deal by quarter’s end.
As a manager, you are responsible for creating a sales environment which is motivating but also sane. Your first goal should be to eliminate noise and distractions so that your reps can focus on methodical sales. Your second goal should be to make sure your reps are paid fairly, accurately, and on-time. Finally, your third goal should be to get them excited about potential rewards. Let’s start with the first goal – a sane sales environment with fewer distractions and less noise.
One type of distraction happens when your reps don’t trust their commissions. Inevitably, they will implement some type of “shadow accounting” to verify payouts and calculate their own commissions. This will result in disputes and significant time wasted. To create a sane sales environment, commissions must be transparent, accessible real-time, and easy to understand. As a first step, make sure your plan is simple to understand.
Let’s talk about the role of luck in commissions. Suppose that the territory you own (ex: the Pacific NorthWest territory) lands Amazon as an client. The beauty is, you never even reached out to Amazon! They signed up on their own without any involvement from you. It just happens that you own the territory. That’s called luck, and it can have a large impact on commissions.
Organizations should try to limit the impact of anomaly-creating luck. For example, you could use caps (although they should be high). Much better, you could also compensate your reps for effort (ex: number of appointments, number of customer visits, etc.) rather than just closing sales. Reps don’t like caps, but they do understand effort. If effort is part of your commission metrics, you will also inherit natural (and fair) limits to commissions.
To recap, compensation should also take into account effort and behavior – not just top-line sales. For instance, when one of our customers switched to a new commission structure, a portion of compensation was allocated to customer satisfaction, customer appointments, and customer retention. Reps understood what they had to do to increase their payouts because concrete sales actions would lead the way. They became more excited about potential earnings given a fair, level playing field.
A brief note on quotas. When a rep blows through his/her quota, it’s tempting to conclude that the quota was too low. It’s true that quotas do need to be adjusted over time. However, it’s also important to ensure reps don’t feel that unfairness plays a significant part in commissions. Resetting quotas too often can negatively impact sales motivation. Adjusting quotas is a sensitive piece of sales compensation, and it is prone to disagreement. Some will feel that failing to adjust quotas means that earning commissions will become too easy. Others will argue that raising quotas is just a way to penalize reps for strong performance. If you don’t need quotas, great!
Otherwise, cumulative quotas can help reps remain motivated during times when they might be struggling. Those reps will know that, even if they miss a goal along the way, future wins can help them reach their cumulative target next time around. Finally, draws can also protect vulnerable reps. You can decide whether these draws are recoverable (i.e. they must be repaid by future commissions) or non-recoverable (i.e. they are forgiven).
Test #3 – Are Commissions Paid Accurately And On Time?
One way to destroy goodwill in a sales organization is to make retroactive adjustments to commissions. Let’s say you earned a solid $5,000 commission. One week later, your admin shows up to tell you they want $50 back because of an error calculating commissions. Here are some of the things your rep might think:
- I’ve already spent this $50!
- Please get your act together…
- I did a great job, can’t you let it go?
- Are you going to ask me for another $50 tomorrow?
Another way to damage sales motivation is to pay commissions late. Like adjustments, delays in payment raise doubts about commission accuracy, sales ops competency, and even your organization’s financial stability. And it’s very possible that your reps were counting on this money to pay their own bills on time.
Some organizations institute a buffer / waiting period before paying commissions. Note that a planned waiting period isn’t the same thing as an unplanned delay. While it causes rewards to be a bit more disconnected from sales, a waiting period gives you time to check that commissions are 100% accurate and ensure they’re always paid exactly on time. Obviously, automation is also key in terms of paying commissions accurately and on-time.
Test #4 – Are Your Commissions Exciting Enough?
Sales reps have been paid commissions for centuries. All sales organizations use commissions for 3 main reasons. First, measuring the short-term output of a rep is reasonably easy. Second, sales reps normally work with limited supervision. Commissions give managers some level of control which compensates for their inability to check whether a rep is playing video games vs. actively selling. Third, sales reps typically have a larger appetite for risk. Therefore, a pay structure with more significant upside just makes sense to them.
To recap, your commision structure should compensate your reps for being risk takers. Various studies about sales behavior show that the more uncertain sales are, the more a rep’s pay should be based on commissions. Conversely, the more stable sales are, the more a rep’s pay should be based on salary. This is why industries with frequent / rapid sales (ex: door-to-door, canvassing, etc.) or which correlate directly with individual effort have a higher variable component.
In an academic setting, lower-performing students require quizzes at regular intervals to motivate them. On the other hand, top students will do fine when their grade is determined by a final exam. The same rules also apply to sales commissions and sales reps. To get the most output from a rep, the best option would be to tailor commissions to each unique individual based on their own preferences and way of getting motivated.
Some reps are more motivated by cash. Some are more motivated by recognition. Some are motivated by non-monetary rewards (ex: trip / vacation). Some respond better to annual bonuses. Some are more productive when focusing on a quota. Some view bonuses as purely transactional. Others perceive bonuses as a true form of goodwill between management and them.
Of course, defining one plan per individual would be quite difficult and costly to manage. There may be some water cooler discussions as well, with reps sharing detailed information about their compensation with others. This could raise concerns regarding fairness. One solution is to create a common commission structure with a few “twists” for specific individuals based on their own individual goals and response.
For some reps, winning an iPad may be more motivating than earning an extra $300. Some organizations may even experiment with novel approaches to see what works. Instead of stating “you need to close 10 accounts to get $500“, how about stating “you’ll get $500 unless you don’t close 10 accounts“? This is of course more of a curious experiment about rep psychology, but give it a try!
To truly motivate your reps, automation and a working structure are equally important. Our observation of top performing sales organizations leads us to the following recommendations:
- Create intent-based commissions to promote specific behaviors
- Design commissions around 1-3 primary sales goals per role
- Take into account effort to reduce the effect of luck on commissions
- If using quotas, make them cumulative to allow for recovery
- Use temporary recoverable draws to protect vulnerable reps
- Add buffer time to help you consistently pay correctly and on-time
- Use a common commission structure but include personalizations
- Survey your reps to check how they feel about their commissions
For a free commission assessment, click here! To automate your sales commission program, please reach out. We’d love to help!