Commission Plans: When to Pay a Sales Commission
The sales force is a pivotal element of business operations. From prospecting and qualifying customers to closing the final sale, salespeople turn innovations and concepts into revenues and profits. A stable currency, the rule of law and the availability of credit have helped U.S. businesses develop sales strategies to a far greater extent than other nations, and sales commissions have been an important part of that success.
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Plans
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Commission plans are usually based on performance measures, such as sales and profits, the type of product and customer needs. According to Andris A. Zoltners and others of sales management consulting firm ZS Associates, compensation structures that rely almost exclusively on commissions attract the results-oriented salesperson "who believe they can sell anything to anyone." However, these structures may not foster loyalty as salespeople might join competitors offering higher commission payouts and potentially take customers with them. Consultants Jean Williams and Nick Woodward of human resources consulting firm Hewitt Associates recommend designing simple commission plans with measurable targets and setting minimum sales thresholds before commissions kick in.
Talent
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Joe Miller, chief executive officer of sales solutions company BlueChip Solutions, believes that companies should pay for top performers to get superior performance. Management should demand top performance and set clear goals so that the sales force understands the rewards and consequences of good and bad performance, respectively. Base pay and commission payouts are usually inversely related, but Miller advises companies to provide something to new hires to live on until they have established a steady commission flow.
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Downturns
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Miller counsels companies against cutting back on sales force compensation during economic downturns. Once talented salespeople leave a company, it is usually difficult and expensive to get them back. In fact, companies that recruit productive salespeople who have been laid off can gain a competitive edge once the economy recovers. Patrick Stakenas, co-founder of sales management solutions provider ForceLogix, suggests that companies should adapt to changing economic circumstances. Sales managers should concentrate on building high-quality teams with staff who can benefit from additional training and guidance. A strong team reduces wasted effort and frees up management time to concentrate on more strategic issues.
Considerations: Bonus or Commissions?
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Sales compensation structures can involve bonuses, as well as commissions. When the skill and effort of the sales staff are the primary factors driving sales, Zoltners advises companies to use the commission structure. If the time between sales lead generation and closing is short, use the commission structure with more frequent payouts; for longer selling cycles, use the bonus structure. Commission structures are well suited for managing expenses to sales volumes, especially when market volatility and poor demand visibility make planning difficult. Bonus structures work better when there is stable and predictable demand and expenses can be managed to a fixed budget.
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References
- "Harvard Business School Working Knowledge"; Birth of the American Salesman; Laura Linard; April 2004
- Complete Guide to Sales Force Incentive Compensation; Bonus Plan or Commission Plan?; Andris A. Zoltners, et al.; 2006
- Hewitt: Are Your Sales Commission Plans Really Maximizing Sales?; Jean Williams and Nick Woodward
- "Entrepreneurship"; Great Compensation Plans Need Great Salespeople; Joe Miller; 2006
- "Inc."; How to Stay Relevant in Sales; Patrick Stakenas; August 2009
Resources
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