Revisiting the tried and true—commissions for the sales force
Commission-based compensation plans for sales forces have been around forever in one form or another. Historically, sales pay has been synonymous with commissions.
Over the years, commission plans have proved to be an effective approach for paying and motivating a specific type of sales force and have become the staple of such industries as insurance, real estate, financial services and transactional deal making that can range from autos to entire companies.
A commission plan is the simplest form of variable pay. In a commission plan, the sellers (generally) get a set portion of the deal at the time of closing or delivery—say 5% of the sale.
From an administrative & communication perspective, it is also the simplest pay arrangement to manage—for if you know the amount of the transaction, you also know the amount of the commission to be paid.
We are often asked by clients whether a commission arrangement is right for their sales process and sales force. The answer to that inquiry will vary. Let’s look at when a commission plan is effective and when it is not. And then we will provide you with some ideas on how to assess the effectiveness of your current commission plan.
When is a sales commission plan effective? The simple answer is when it works. But, when do they work? It is our experience that a sales commission plan will be most effective when:
- The sales representative is the primary seller and influencer of the transaction and they are the company’s unique linkage with the client. In short, there is a straight line from seller to customer.
- The company is in a sales growth environment and has the strategic vision (and ability) to rapidly gain market share.
- The product-line offering is simple and most products or services are equally profitable or valuable to the company. There is little consideration or thinking about what should be sold, or what should not—based upon profit contribution.
- The seller is simply that—a seller. They do not spend much (if any) of their time servicing the product or providing logistics support to the client organization.
The ideal place for a commission plan is generally in a new or evolving company where the sellers assume a “missionary” role positioning a new product into the market or taking business (and market share) from competitors. In such a case, they are often asked to rapidly gain market share from new clients. They are both deal maker and closer. In short, if your sales process and product offering are both pretty simple and straightforward (direct), a commission plan will probably work pretty well—with some exceptions.
Conversely, sales-commission plans are less effective in situations that are markedly different than (or in contradiction to) the above conditions. For example:
- The seller is an integral part of a sales team and closes deals only through the collaboration of other support resources;
- The company is in a declining growth or stagnant market where instead of gaining market share, its share may be flat or the company is losing share—price has likely become king;
- The company has a moderately complex product line with wide differences in profit contribution between one product and the next. The company cares very much which products or services the sales force encourages its clients to buy—or not buy; and
- The seller must spend much of their time fixing service and delivery problems to the exclusion of making sales calls on current or new accounts.
What we often find is that companies rightly adopt commission plans for their sales force when they are in a start-up situation and/or are trying to rapidly grow share of market. Then as the business and market matures and the motivational effectiveness of their commission arrangements (from the perspective of the company) diminishes, they stubbornly stay with their old commission plans. Then what we often hear is: Why can’t we get our sales force interested in growing the business (and their territories)?
Why has that commission plan become less motivating and effective? The most common reason we have observed is because a commission plan provides decreasing sales-force motivation to grow sales once the territory or portfolio has reached a certain critical mass where the sales rep is comfortable with their commission earnings. For example if a sales rep earns 5% of their $2 Million book of business and they are very comfortable in being paid their $100,000, it is unlikely that the company will be capable of motivating the sales rep with its commission plan to add another $1 Million in sales to their territory—or any amount much higher than the annual price increase. Of course realistically as the company matures and evolves, it is also very unlikely that high annual growth rates can be achieved without major changes in products, sales process or the marketplace itself.
Some would say that a true deal-maker will always be hungry to earn increasingly more money, and that is generally true. But, the true deal makers are very likely gone by the time the company has passed it initial growth phase or is beginning to reach its maturity. The pay arrangements that once turned on the deal maker may no longer drive different-types of sellers with a less-entrepreneurial profile or make up. That legacy $100,000 commission check is likely enough to keep them quite happy—“And who needs to go the extra mile or make the extra sales call, anyway?”
Is your sales-commission plan effective? If you now employ a sales commission plan, consider asking the following 5 questions to find out.
- Does your company have the realistic potential to grow sales well in excess of annual price-increase levels—i.e., market share is there for the taking? (If you say you cannot answer that question, you should rapidly take steps to do so!)
- Is your sales force consistently growing annual sales well in excess of price-increase levels—i.e., they are grabbing that available market share?
- Is your sales force regularly making in excess of 15% of their annual sales calls on new accounts or regarding new-business matters?
- Does the compensation paid to your different sales representatives vary widely amongst reps year in and year out? [Notwithstanding the perpetual standouts]
- Do the members of your sales force generally appear dissatisfied with current pay levels and are vocally and constantly seeking ways to realistically increase their earnings—i.e., they are pushing not just whining?
If you can answer yes to at least 4 of the 5 above questions, it is likely that your current commission plan remains effective and is a good fit for your current sales force & process. If your score is lower, we would suggest that you start considering alternative methods for paying & motivating the sales force.
What are those alternatives? Next month we will review reliable ways and methods for companies to improve the effectiveness of current sales pay plans when your commission plan is losing its “pop.” Tune in.
Wilkening & Company has assisted clients with the design of effective sales pay systems for since it was founded in 1989. Since that time, we have designed over 100 sales force and sales management compensation systems.