What to do when your commission plan is losing its “pop”
In our June 2012 edition of E-Notes we discussed the use of sales commission plans for the sales force and how to determine when such a simple pay arrangement best fits your sales process and sales force.
In last month’s article we suggested that if you found or believed that your current sales commission plan was no longer effective in meeting the needs of the company, there were proven solutions available to help restore its effectiveness.
As earlier stated, a commission plan is generally most effective within a new and evolving company or a sales channel where the seller is the primary selling influence and the company’s strategy leans heavily to the rapid growth of its market share. The risk of the market and the selling process make (and have historically made) the commission plan an ideal pay solution for both seller and company.
But, as a market or company matures and the sales process changes accordingly, a commission pay plan may lose its effectiveness. The risk and return relationship will usually lose its attractiveness to both seller and company—while the company sees either a slowing of sales growth or an erosion of profit margins. Further, the seller who truly desires the risk and return of a commission plan may have already moved on to greener pastures. This is a common situation.
If you suspect that you are in that situation and need to do something to improve your commission plan, we have found that there are generally two types of “in-place” solutions you can employ—short of throwing out the whole plan and starting over. Let’s discuss each.
- If you are seeing your profit margins erode and your commission sales force cannot seem to control it, try the simple solution of changing the primary commission metric from sales volume to profit contribution (dollars). You will have to adjust the commission rate accordingly (upward) for fairness, but suddenly the discussion will change from only sales calls to pricing and profit margins.
Of course some companies do not want to share their profit margins with the sales force (or anyone else) as this may be considered to be a competitive advantage. If that is true in your case (and reconsideration is not possible), use (for example) three (3) separate commission rates that vary based upon profitability. Now some would ask: how many commission rates are too many? I use three as an example and would not personally advise any more for simplicity. I once saw a client who previously adopted such a multi-rate approach and was using twelve (yes, 12) different rates. Needless to say, that was too many.
- If you are finding your sales growth is diminishing and your sales force is not really concerned (and remains pretty well and steadily paid—also not an unusual occurrence), try introducing a simple goal-based bonus or incentive in parallel withsales commissions.
One thing lacking in the typical sales commission plan is an annual expectation of performance established by the company for the seller. This is a real limitation of commissions and sales growth may suffer. To address this, introduce a simple bonus or incentive, with the commission. It could work something like this:
- Pay a commission on every dollar of annual revenue as before but do so at a lower rate—at (say) one-half or two-thirds of the “old” commission rate.
- Then, establish an annual bonus that pays out incremental cash amounts based upon performance versus the company’s annual expectation of performance or achievement for sales volume.
As a general rule, pay the seller less (in combined new commission and bonus) than they would currently have earned under today’s commission plan if they fail to achieve the company’s annual revenue expectation. Pay the seller more than the current plan if they meet and exceed that expectation.
If you find yourself questioning the effectiveness of your current commission plan, it is likely something is wrong and remedial action needs to be considered. The two alternatives that we have offered are both proven and reliable ways for a company to improve profitability and grow sales volume in a commission-pay environment—without throwing out the entirety of the old plan.
If you like our ideas simulate one or both “in shadow” (calculating results only on paper with no impact on real pay) with your current sales pay plan for the remainder of the year. See who would make more or less and decide in the 4th Quarter whether a pay-plan design change would improve your sales effectiveness and performance for the coming year.
Try it. I bet you will be pleasantly surprised at the results.