The importance of commission structures: The good, the bad and the ugly

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In any company with a sales department, a well-planned commission structure is a critical factor to success. It is a way to compensate your sales reps for their hard work and diligence after an often lengthy transaction. Like all good things in life, they come in various shapes and sizes. Commission structures can range from team-based or individual-based, from high salary with low commission or no salary with full commission. To make things even more confusing, they can be paid on a monthly, quarterly or even yearly basis! So with all these variables in play, what are the ‘must-dos’ and ‘must-nots’? How can you put an effective plan in place to ultimately motivate your team to achieve the best results?

Though our biggest piece of advice is to customise a commission plan for your specific company, here are two major aspects to keep in mind:

Market Strategy

In today’s highly competitive marketplace, you need to be able to differentiate your company in order to retain talent. According to the Australian Securities and Investments Commission (ASIC)[i] there were 793,158 companies registered in NSW during March 2017. Though all these businesses may not have a sales team, as of April 2017 there were 8,174 sales roles available on Seek.com.au, within Australia. This shows that there is a LOT of competition with increased possibilities of similar products and/or offering their staff better commission structures. Therefore in such a crowded market, offering a strong commission structure is an important factor in drawing in the most motivated ‘sales gun’.  It is important to note, that this stage involves identifying current leads as well as putting a plan into place on how to generate future leads.

Keep it simple. Ensure that the structure is fair across the whole company. It needs to be simple to understand and simple to achieve. This needs to be an achievable target the reps can work towards. Our managing director, Daniel Hale, suggests putting in place an uncapped tiered structure with a ramp-up period where the targets are lower and comms are easier to achieve. This is the first 3-6 months where the rep is still building a pipeline. As this is often from a standing start, this period really helps to give them an achievable target while keeping them hungry for more. Being paid out on a monthly or quarterly basis will allow for achievable targets and the rep to really see the tangible results of their hard work.

Incentive

The next aspect to focus on is to use an accelerator. Having a steady return for lower thresholds will spur on most salespeople, but doubling or tripling the reward for a stretched target will create a benchmark in the business and something that can be spoken about and praised if achieved. This leap in potential comms encourages the stronger reps to go the extra mile to hit this challenging target. Especially as the difference in the earning potential is SO big!

Furthermore, any knowledgeable salesperson will want to know the details about a commission plan (the better ones will even ask about it in the interview). This could be because it shows how the company values their staff and rewards their best performers, but probably because it’s the best way to double (or even triple) their base salary. This increased incentive will not only cause your sales rep to push for the close of a sale, but also build and maintain client relationships. Daniel also suggests that ensuring the fair treatment of your sales team will make your reps work the extra mile to ensure the deal is closed and closed well.

Importantly, all good BDM’s know their worth and know what their base salary should be. Therefore finding a ‘no salary and high commission’ option is more common in a Business-to-Consumer sphere, rather than Business-to-Business. This could be for numerous reasons, but Daniel suggests that it can create an unethical and aggressive atmosphere where reps will do anything to close a deal. For this reason, comms work best when blended with a reasonable base salary, especially at the “Enterprise” level. In doing so, it will allow any company to attract, motivate and retain quality talent.

Commission structures provide the fairest form of rewarding a hard-working sales staff. By having these targets put in place, the sales reps will have realistic goals to reach. Not to mention, to maintain a healthy sales culture it is important to openly congratulate and celebrate the employees who hit the targets. This will raise morale, increase confidence and probably lead to higher future sales.

According to a 2016 study by the Society of Human Resource Management[ii] 63% of employees find that compensation or pay is a very important factor in impacting their job satisfaction. With sales reps bringing in a large proportion of a company’s revenue, a healthy commission structure will not only reward a dedicated sales team but also encourage higher rates of retention.

Overall, implementing a fair and well-thought-out commission structure can only be beneficial to the company as a whole.

In any company with a sales department, a well-planned commission structure is a critical factor to success. It is a way to compensate…