Recently, we participated in a discussion of 2011 sales incentives in which the newly appointed CEO of a global business services organization asked: “Why aren’t we using sales commission plans to pay our sales forces? Wouldn’t we be more likely to achieve our business plans if our sales people had a stake in sales they made?” Those questions suggested to us the CEO believed a sales commission plan is more likely to contribute to business success than other approaches (e.g., a sales bonus plan).
The subsequent discussion of those questions by the senior leaders who participated in the meeting proved to be a valuable learning experience. Essentially, it resulted in a shared understanding about how to decide when a sales commission plan is right for a particular business situation. The purpose of this Short is to provide information that other senior leaders could reference when faced with how to decide if a commission plan is the most appropriate sales incentive plan to use.
COMMISSION DEFINITION
A commission plan:
- Is variable pay based on a stake in a sales result (either individual or aggregate sales transaction(s))
- Involves a rate that is either fixed or variable and can be applied to total sales volume or segmented sales volume (either selected customers or products)
The administrative requirements associated with using commissions effectively include:
- Confirmation that there is relatively equal opportunity across sales reps’ assignments
- Defined procedure for setting competitive and financially viable commission rates
- Capability to track and assign all sales to the “seller”
SALES ENVIRONMENT
The cultural and behavioral aspects of the sales environment in which sales reps operate have implications for the use of a commission plan as described in the following table:
SELECTION FACTORS
With that perspective in mind, the following four factors should be considered when making a decision about the applicability of a sales commission plan in a particular business environment. And, as indicated in the table below, if the majority of the responses the questions associated with these factors are “yes”, the use of a commission plan is then directionally correct.
Finally, before moving forward with a commission plan it is important that management thoroughly discuss how territories and quotas will be addressed. Typically, a commission limits flexibility for both and, thus, it is important to agree in advance how those decisions will be made.
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