Managing Sales Commission Plans

There is no doubt that incentives and commission-based reward plans continue to be a critical element of an effective sales strategy.  When badly designed or implemented plans are put in place the impact on the salesforce can be significant – for all the wrong reasons.

Getting it right can seem like chasing the Holy Grail.  Attempting to satisfy the requirements and requests of all your stakeholders across, up and down the business may appear impossible, and quite often probably is!

Below we share the approaches we’ve honed over many years of working with some of Australia’s largest and most prominent sales teams – helping their people to focus on what’s really important whilst delivering a meaningful return on investment for the business.

Guiding Principles

Before launching into the design proper it’s imperative to confirm what the sales incentive plan is expected to achieve.  This is the best opportunity you’ll have to manage the expectations of senior leadership.

Any suggestion that the Plan alone will suddenly transform sales performance must politely, but firmly, be put to bed early.

This post is not the place to explore all of the magic ingredients required to realise historically notable sales figures.  For example leadership capability, strategy, product design, sales training and customer service are just a few of the elements that’ll likely have a greater impact.

So, what is a realistic role for the incentive plan?  Those familiar with our thinking at Mastertek will recognise the following objectives as those that might be reasonable to achieve through variable reward more generally.

For a greater insight to the best practice principles click below for further reading.

A Rough Guide to Sales Commission Plans
  • Focus individuals and teams on the ‘critical few’ measures of success;
  • Drive compliance with operational imperatives believed to underpin success;
  • Recognise and reward out-performance.
  • Manage salary cost exposure/overheads by paying ‘post-performance’

If these objectives can be achieved the impact on sales performance should be positive.  But keep in mind the other factors that will influence sales outcomes and be critical and honest in your appraisal of their potential impact also.

A beautifully and rationally designed sales incentive plan will not magically enable your under-skilled sales teams with ineffective leaders to sell bad products supported by poor after-sales care successfully for any period of time.

And be clear about one thing at the outset – incentive plans (sales or otherwise) cannot replace hands-on leadership.  Believe me, keeping these principles front of mind will vastly improve your chances of designing a plan that has a positive impact.

Identifying Key Inputs

Having clarified the objectives we can now start to consider the building blocks that will form the basis for the plan design.  Taking a strategic alignment approach, we’ve found that developing a laundry list of potential performance measures is a good place to start.

Some measures will be disposed with later on and some may be better addressed through other plans or processes, but it’s important to ensure the design process considers everything that ‘might’ be important.

Volume Based Measures

Volume Based Measures

  • Productivity measures
  • Number of units sold
  • Customer numbers signed

Value Based Measures

Value Based Measures

  • Revenue generated
  • Profit margin

Quality Based Measures

Quality Based Measures

  • Customer satisfaction
  • Compliance rates
  • Net Promoter scores

There’s no better process than good, old-fashioned brainstorming with your key stakeholders.  Exploring things with groups with different perspectives helps ensure the most rounded view so meet separately with Executives, Sales Leaders, Sales Teams, Finance and HR representatives for example to identify how they believe performance should be measured.  We’ve found that asking groups to consider the different types of measures that might be relevant according to our volume/value/quality model really helps to spark the imagination.

Prioritising and Structuring

Having established the various measures of performance that might form the basis of an incentive plan the next step is to organise them into some sort of structure.

We tend to start this process by considering a hierarchy of importance based on the model shown on the right.

In order to be effective, the plan needs to be intuitive so that the link between performance and reward is clear and the incentive on offer is motivational.  A key to good design is to keep the plan as simple as possible.  Avoid trying to accommodate every single thing that you ‘might’ want your salespeople to do into the sales incentive plan.

Don’t be afraid to cull from your original laundry list of performance measures and consider the use of other related programs such as recognition schemes to reward the right behaviours more generally for example.

At this stage you’ll need to critically appraise the practicality of the various measures identified.  Are there processes in place to accurately and efficiently track progress and measure performance against the measures?  If not, is there a work around that can be used whilst these systems are put in place?

Most of the plans we’ve seen fall over have done so because the supporting systems simply never came on stream…

Ideally, the sales incentive plan should reflect the core focus of the participants whilst not losing sight of the other measures of performance or behaviour considered important to the business.

Payout Curves, Calibration and ROI

Fundamental to effective plan design is understanding the relationship between performance targets and incentive payout levels.

The challenge involved in this part of the design process cannot be underestimated and is quite often a source of internal conflict between different layers and functions of the organisation.

For the plan to operate effectively in any given performance period you’ll need to understand whether performance targets (e.g. sales budgets) reflect the minimum expectations, ‘on-target’ performance levels or are more ‘aspirational’ targets.

Once the performance targets are understood comes the challenge of establishing an appropriate level of incentive payment.

Setting the performance targets too low and the payout levels too high in relation dilutes the business’ return on investment and means the organisation potentially pays out for sub-optimal performance.

Set the targets too high, however, and the participants may feel that the incentive opportunity cannot be realised and discount the plan from the outset.  Our advice is to get hands on with the numbers – in fact due diligence demands it.  It is absolutely imperative that you and your key stakeholders understand what the incentive plan will pay out in different situations.

There really is no room for surprises here and so the answer is to model, model and model some more.

  • Model a variety of payout scenarios and vary the amount that would be delivered in incentive payments to assess the impact.
  • How do the overall reward outcomes look from a participant’s perspective? Is the incentive likely to sufficiently influence behaviour?  Do the outcomes offer a market competitive reward opportunity?
  • Correlate the payouts to revenue and profit projections; how much are you willing to share with the sales force?
  • Further test the projected outcomes against any future revenue either locked in or projected based on the sales performance being measured (e.g. if it is anticipated that a new client signed in year one is likely to re-subscribe in year two).
  • There are many design techniques that can be utilised to optimise the balance between performance and payout levels and you’ll want time to explore them in detail.

Implementation and Leadership

Successfully implementing any kind of organisational change can be challenging, so much so that it’s best left to a separate post all of its own… Here, though, are some of the key things to think about before you unleash the beast!

Supporting Systems

Supporting Systems

Do you have the systems and tools in place to support ‘go live’? If not, what workarounds will be utilised until systems come on stream?

Change Management

Change Management

How will new arrangements be communicated and by whom?

Training and Development

Training and Development

What program of training and development is required to ensure everyone is able to deliver against the new performance measures and utilised ay associated tools or processes?

Leadership Readiness

Leadership Readiness

Does the senior leadership need additional time and support upfront in order to champion the program once it’s rolled-out?

Commission plan design can get very complicated, very quickly – we’re here to help.

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