Are your sales commission plans really maximizing sales? |
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"What gets measured, gets done - what
gets measured and rewarded gets done
even better". This is the consistent
mantra underpinning all variable reward
programs, with sales commissions being
perhaps the most transparent and highly
visible of these plans.
Structuring the salary packages
of salespeople in a way that
maximizes sales is an important
factor in the success of any business.
How does a commission plan differ
from other variable pay plans?
As you start to consider your
commission plan, what you want to
achieve and what you are going to
measure, it is important to keep in
mind the underlying definition of what
constitutes a commission plan.
Commission is a type of variable
pay where the participant knows their
sales target and how much they will
get if they reach their sales target,
with both communicated at the start
of the measurement period.
A variable pay plan that distributes
a proportion of the profit at the end
of the year is not a commission plan
because generally the recipients don't
know at the start how much they will
be getting. That is a bonus plan.
A variable pay plan that measures
performance against non-sales
objectives or KPIs, regardless
of whether or not the value is
communicated at the beginning of the
period is also not a sales commission
plan. That is an incentive plan. |
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 Assuming a sufficiently attractive reward is on offer, the sales commission plan will directly impact sales behavior |
Variable pay plan examples
The table below illustrates how the types of
plans differ for an employee on $90,000 with a
variable pay target of $10,000.
A sales commission plan will link a financial
reward directly to desired sales outcomes, so
assuming a sufficiently attractive reward is on
offer, the sales commission plan will directly
impact sales behavior.
Types of sales commissions
There are two main categories of commissions;
those that use a target rate and those that
use target pay. Target rate is where a
fixed percentage of the sale is paid to the
salesperson while target pay is where a
commission is calculated so that the participant
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reaches a target level of remuneration once a
sales target is met.
Target rate is best applied where the sales
person is also the source of the income, for
example a real estate agent or a mortgage
broker. Target pay is used where the income
is generated from the organization's product/
service such as a sales representative for an
It vendor. Approximately 95% of sales roles
fall into the second category so the scenarios
discussed here will focus on target pay.
Example of target pay for a sales
representative
Let's take the case of a sales representative,
Dave, selling a relatively transactional product
- enterprise servers. |
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| Type of Plan |
Measure |
Value to
participant |
Example |
| Bonus / profit
share |
Overall company
or business unit
performance |
Known only
after the
performance
period |
| Employee is eligible for profit share,
which is 5% of profit, divided among
100 staff. |
| Profit is $1,000,000
Value to each employee is $500 |
| Profit is $10,379,864
Value to each employee is $5,189.93 |
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| Incentive plan |
Individual and/or
team performance
against predetermined
objectives or KPI's |
Known from
the start of the
performance |
| Target variable pay is paid on
achieving 100% against objectives. |
| Employee achieves 100% of
objectives
Value to employee is $10,000 |
| Employee achieves 80% of objectives
Value to employee is $8,000. |
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| Commission
plan |
Target is sales of
$1,000,000 over 12
months |
Known from
the start of the
performance |
| 1.0% of all sales to target and 1.2%
of all sales above target. |
| Employee achieves sales of
$1,000,000, commission is $10,000 |
| Employee achieves sales of
$1,200,000, commission is $12,400. |
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Dave's annual total remuneration is
$150,000, comprised of $90,000 fixed
remuneration and $60,000 annual on-target
commission.
Utilizing market survey data from a provider
such as Hewitt CSi, Dave's employer is able to
ensure his total remuneration, assuming targets
are met, is positioned at the 75th percentile of
the external market for this role. The split of
60:40 between fixed and variable remuneration
is in line with the organization's standard
policy for this 'hunter' style role.
DAVE SMITH
Sales Representative, Company X
Remuneration Package
Annual Fixed Remuneration $90,000
Annual target commission $60,000
Total target Remuneration $150,000
Dave has an annual sales target of
$4,000,000, with commission paid quarterly.
At the end of each quarter, Dave's
commission will be calculated by measuring
his actual sales against his quarterly target
($1,000,000) and applying this to his quarterly
on-target commission ($15,000).
For example, in the case below, assuming
Dave sells $900,000 of product for the quarter
(90% of his target figure), Dave will receive
90% of his target commission ($13,500). |
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| COMMISSION CALCULATIONS |
| Annual sales target $4,000,000 |
Annual target commission $60,000 |
| Quarterly sales target $1,000,000 |
Quarterly target commission $15,000 |
| Actual sales (for Quarter) $900,000 |
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| % of Target Achieved 90% |
90% |
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Commission Payable $13,500 |
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Structuring sales commission plans
Of course, the previous example is a simplistic
model. There are a number of levers or
variations that are typically added to such
models in the 'real world' to a) increase
motivational impact to the successful
salesperson, and b) balance business realities
with the need to reward successful sales
employees.
The graph below helps to illustrate some of
these levers. |
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Setting a baseline for minimum
performance level
Hurdles (floors/thresholds) indicate that a
minimum performance level must be reached
in the given performance period before any
commission is paid to an employee. These are
in place so that no commission is paid to low
performers. Hopefully very few salespeople
fall into this category and the business can
spend more time worrying about the issue of
rewarding its over-achievers! |
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Rewarding over-achievement of sales targets
This brings us to the more exciting aspect
of sales commissions - what to do when a
salesperson exceeds their targets - what is the
'up-side' for the employee?
The accelerator is the most common method
applied. Put simply, the rate of commission
paid is accelerated for every dollar earned
above target. This encourages the employee to
not only meet their targets, but to 'smash their
targets'!
In some organizations, protection exists
against seasonal fluctuations by holding back
accelerated payments until the end of the
financial year before delivering to the employee
in the form of an end-of-year 'kicker' or 'top-up'
payment.
Capping the cost of over-achievement of
sales targets
Organizations may then apply decelerators
or caps that apply once an employee meets a
particular level of over-achievement. While
protecting a business against poor budget
setting, caps are known to act as a demotivator
to over-achieving salespeople, who
strive for the 'dream deal'.
Rather than applying a cap, it may be more
appropriate to have a windfall clause, some
guiding principles about how commissions
may be managed to protect the organization
from unexpected scenarios such as a change in
legislation that brings a flood of new business.
Other levers and variations that may be
applied dependent on business strategy, sales
cycle and product type include weighted plans,
trailing commissions for multi-year deals,
incorporation of non-financial measures, team
targets, and one-off bonuses.
The end of year 'top seller's' club remains
a feature of many organization's sales forces,
with lavish reward trips for high achievers
still a common method of promoting friendly
competition amongst the sales team.
Like any variable pay scheme, a well-designed
sales commission plan can have a considerable
impact on an organization's bottom line.
To ensure it continues to support the
overall business objectives of the organization,
it should be reviewed at least annually to
maintain and enhance the crucial linkage to
business strategy. |
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Checklist for constructing a successful sales commission plan
There are two main pitfalls in constructing a commission plan.
The first is to set targets on factors that cannot be measured. The other
is to construct a commission plan that is too complex.
Here is a quick checklist to ensure you haven't 'overcooked the detail':
| 1. |
Can I measure everything that needs to be measured for the plan
to work? For example, profit on a service is difficult to measure and
often not known until the end of the project. |
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Do I have any measure that is worth less than 15% of the
commission payment? 15% is not generally seen as valuable
enough to be motivating. |
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How different are my plans for the different roles? The plan
shouldn't differ greatly from role to role. For example, if reaching a
revenue target is the aim, then that should be reflected for all roles
participating in the commission plan. |
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Is my commission plan overlapping with other variable pay plans?
Commission plans reward performance against pre-communicated
sales targets or quotas. The tools to direct how work is done or to
reward performance of salespeople in non-sales activities are an
incentive plan and a good sales manager. |
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Is my plan too complicated? To break this down check that: |
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The salesperson can work out the end result |
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There are not more sub clauses than main clauses |
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It doesn't take an unreasonable amount of time to administer
each month |
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There are no more than 3 levers or variations |
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The authors from Hewitt CSi can be reached
at jean.williams@hewitt.com and
nick.woodward@hewitt.com
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Hewitt Quarterly Asia Pacific
is made possible through the combined skills and experience of Hewitt consultants from across the Asia-Pacific region.
For further information please contact:
Hewitt Associates
2601-05 Shell Tower
Times Square
Causeway Bay
Hong Kong
Tel: (852) 2877-8600
Fax: (852) 2877-2701
editor-hqap@hewitt.com |
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