Develop a successful sales commission strategy

One of the biggest challenges a company can face is developing an effective compensation strategy or commission structure for its salespeople. Get it wrong and you chase away your best performers, or encourage the poor performers to stay on. Either way the business loses out because growth is inhibited.

“The often-quoted saying: ‘pay people peanuts and you get monkeys’ is not that far off the mark,” observes Ian Rheeder, a marketing consultant & sales trainer with Johannesburg-based company, Markitects. “You don’t want your bottom performers earning too much or you will be stuck with them forever. At the same time, you want your top performers to be empowered to write their own paycheques – or you will lose them to the opposition.”

Obviously then, a commission structure requires much forethought and careful planning. A survey in the respected American business newspaper, the Wall Street Journal a few years ago revealed that 59% of managers believed their remuneration plans didn’t work, while 49% were of the opinion that they overpaid their poor performers.

“Because we’re dealing with volatile conditions and sometimes hot-blooded individuals, compensating salespeople is just as much an art as it is a science,” says Rheeder.

There are a number of benchmarks that management can use when determining sales commission. These can include:

  • Volume of Sales;
  • New Accounts Gained;
  • Size of Order;
  • Number of Orders;
  • Prospects Called Upon;
  • or even Accounts Lost.

Managers can also track Margin, which is a more relevant measurement than volume in circumstances where the salesperson has control over the price and type of product sold.

In setting up the commission structure, managers must first analyse the degree of influence that the salesperson has over the sale. In some industries, products almost ‘sell themselves’ and the salesperson is little more than an order-taker. But in others, much research needs to be done and clients need to courted over a long period of time. In the latter instance, commission would obviously be higher.

Similarly, some sales may be a collaborative effort also involving the likes of product engineers and business development staff. In this case, the salesperson would receive a lower rate of commission.

In other instances, the lead-in time and sales cycle can be so long that the salesperson’s main focus will be on a steady paycheque, with commission being only a small part of the compensation package. An example would be an aircraft salesman or someone selling heavy industrial plant and equipment – where the lag time between order and payment could be anything from a year to a decade!

Management also needs to be aware that a high risk/high reward commission structure (where commission forms most, or all, of the package) can have unintended consequences. A salesperson remunerated in this way may become overly aggressive in pursuing deals, which can chase customers away.

The following are some of Rheeder’s key tips to managers who are charged with setting up a sales commission structure.

  • It’s a novice or lazy sales manager who sets the same commission for all products. Choose which performance measure best suits your firm (ie. Volume of sales, number of orders, size of order etc) and then align commission with strategic sales objectives by using a sliding scale of remuneration. For instance, a new product with a high profit margin for the company should attract higher commission so that it will be pushed hard by the sales team.
  • A remuneration plan that worked last year may be dismally ineffective this year – so keep tweaking to match the shifting trading environment. What are the new strategic marketing objectives? Which products need the most attention? Have service levels dropped? Are we losing market share? Who’s attacking us and which competitors should we hurt? What product range needs to be pushed for strategic reasons?
  • Have specific job titles and tiered grades, which enable staff to differentiate between their basic salaries and incentive structures. This also helps career path planning. There are over 10 different types of job descriptions for sales people, so don’t think a key account manager, who does more servicing than selling, should be on the same structure as a sales consultant bringing in new business.
  • Consider IBM’s five pronged approach which will make salespeople alert to getting things done: a basic salary; monthly commission; quarterly commission for different key performance indicators (KPIs); annual performance bonus on different KPIs; and a recognition awards function where a large percentage of the sales force is rewarded across various categories.
  • If you want to play with a salesperson’s pay structure, don’t switch over to the new package immediately – do a three to six month ‘dry-run’ so they can start giving the new KPIs their full attention, then compare what they would earn on the current vs. proposed pay structures. This prepares them psychologically, which, with today’s pressures, will improve their wellbeing on every sales call.
  • To enable salespeople to chart their own course, remuneration must be meaningful and measurable by line-of-sight: at any given moment a salesperson should be able to calculate the bulk of their paycheque.