Some companies are faced with the question of whether a 100% commission plan is the best commission plan design for them. There is clear benefit of tying the costs completely to sales and reducing risk to the company. But they wonder if it will attract quality sales people to their firm. Will it allow the sales people to focus on the right deals that may take longer to come to fruition versus focussing on the short term deals? Will it mean a rush to close deals with poor terms or by discounting excessively.
In many industries the standard practice of paying commissions is already set and other companies have to necessarily follow suit to attract sales people or because the industry dynamics force them down that path. Good examples are mortgage and real estate agency commissions where they are overwhelmingly 100% commission plans. The aircraft industry tends to have salary plus commission plans because of the complex, large sales and the long sales cycle.
100% commission plans work better in industries/companies with the following characteristics:
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The industry standard practice is already set
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Company brand name and products are strong and easier to sell against competition
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Company has a practical monopoly
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Strong qualified leads are available for sales people
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Sales cycles are quick
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Sales are continuous and regular throughout the year
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There is a large pool of potential sales people to draw from
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The product and sales process is not complex
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Sales people are only expected to sell
The majority of sales people look for a certain amount of security and prefer predictable income stream. An alternative is to provide a combination of salary and commissions with an appropriate level of salary versus commissions. Companies with the following characteristics will do better with this alternative:
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The industry standard practice is already set
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There is a lot of competition for your products
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Sales people have to depend on their network or cold calling to find prospects
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Sales cycles are longer
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Sales is cyclical with busy and slow periods
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The pool of sales people that you can hire from is small
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Sales people need a substantial amount of expertise to be able to sell the products
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Sales people have other responsibilities such as customer relationship, collections, managing locations, etc.
There are other possibilities such as draws that can provide compromise between these alternatives. That is a subject for a future article.
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Sales commission plans normally don’t have many rules and regulations. But in certain industries there may be some that you have to watch for and make sure you are not breaking them.
One of the industries that is expected to do well in this economy is college education. People are more likely to turn to further education to improve their prospects and the stimulus bill will make it even more attractive. For-profit colleges which depend to a substantial degree on students who receive government aid will be paying attention to this. They use paid recruiters to enroll eligible candidates. Usually the commission plans are based on the number of enrollees brought in by the recruiter.
According to a Business Week article on this subject, this industry is subject to a rule that says that the recruiter compensation cannot be solely based on the number of students they sign up. This is to avoid the unethical canvassing and signing of students and to prevent abuses. This rule was introduced as part of the Higher Education Act. Companies have settled violations by paying millions of dollars.
There are a few such rules that typically tend to be industry or state specific. Please make sure you are compliant with these rules while designing your commission plans.
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This week we were talking to a customer who was looking for commissions software to automate their commissions. The customer’s current plans were very simple: they pay a flat commission rate to their sales reps on a monthly basis on any sales, that was invoiced to the customer.
But now they want to move to a commission plan, where the commission will be paid when the customer actually pays the company for the invoice. Actually, they wanted to pay a portion of the commission when the invoice is generated and a remaining portion when the payment is received from the customer.
We have seen this type of commission plan used by many of our customers. But it particularly makes sense in this economy. Most customers are delaying payments and any payment that you can get early could be the difference between getting paid for your product and not getting paid at all. So it makes excellent sense to incent the sales people to manage the customers through the process of paying for your products. It will also make the sales person care a little more about having a successful and satisfied customer.
In addition, if the customer never pays, then the company is not out that much money in paid commissions.
Splitting commissions between invoice and payments also makes sense to keep the sales person’s motivation high, since they have made at least some amount of the money up front. A recommendation for this kind of a split would be to pay 30% of the commissions up front with the invoice and another 70% on receipt of payment from the customer.
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