Wednesday, 18 January 2012

Why do you need a sales commission scheme?

The underlying assumption is that rewarding salespeople financially for performance will encourage them to work harder and sell more in pursuit of those rewards.  This view is not borne out by academic research but in practice sales commission schemes are almost universally used.  A carefully-designed commission scheme when implemented on top of good management practices and a solid sales process is a useful management tool – but it is not a substitute for these things.

How to design a sales commission scheme

-          Commission schemes are usually implemented at individual level

-          Ensure that the rewards incentivise the behaviour you want.  You may want different behaviours from an account manager and a sales representative

-          Think carefully about the balance between basic salary and commission.  The two combined form the OTE (on-target earnings) and the balance will have a strong impact on the motivation and behaviour of the salesperson:

o   The lower the proportion of basic salary the higher the OTE, since you are transferring risk to the salesperson

o   A high basic may mean that salespeople do not need any sales to achieve their minimum acceptable income

o   A low basic may result in aggressive sales behaviours or high staff turnover

-          Decide whether the scheme should be based on sales revenue or gross margin:

o   Revenue is relatively easy to measure but may result in unwanted price discounting

o   Gross margin supports prices but is more difficult to measure and can be open to manipulation

-          Implement appropriate controls on the sales process:

o   A pricing model or pricelist

o   Sign-offs

o   Commission payments only after contracts are signed

-          Understand that every commission scheme will have unwanted side-effects:

o   If a salesperson feels they are not going to achieve targets they will hold back new opportunities to the next year

o   Individual targets will prevent salespeople working as a team or spending time on anything that does not contribute to the current target

o   Salespeople will go after the easiest opportunities, which might not be the ones that matter most strategically

-          Check that you can afford all possible outcomes and that better performance against the commission scheme results in improved net margins for the business under all circumstances

-          Make sure that commission targets in total exceed the sales income budget – assume a conservative proportion of target sales will actually be achieved

-          The overall commission scheme rules should be published annually and each salesperson should have a written copy of their own targets and rewards, signed by them and their manager

-          Review performance with each salesperson monthly

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