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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Gopi Mattel Administration, Commission Plan commission plan design, draw, Easy-Commission, qcommission, salary, salary plus commission, sales commission
Calculating commissions using quota may be a difficult method given the current economy. Depending on the industry your company is in, the economy may be playing havoc with your ability to predict future sales and determine quotas for your sales people.
When determining quota for commission plans, it used to be fairly simple. Generally, you’d assume a growth factor and use it against last year’s performance to determine the New Year’s quota. In today’s world where we are less certain of the effect the economy may have on our forecast, you may want to consider another method of calculating commissions instead of quota attainment.
Consider using gross margin/profit to calculate commissions. Using a gross margin/profit method will focus your sales people on profitability instead of revenue which given the economy may not be a bad thing. Not only should you be mindful of costs but also the affect of discounting to your bottom-line. Sometimes in an effort to close deals, sales people can be quite liberal with discounting which will increase your revenue but reduce your margin or profits.
I could tell you several stories of quota based sales compensation plans that provided increased revenue but resulted in overall losses, but lets save that for another time. For now, having unattainable quotas can be demoralizing and unproductive. Too low quotas makes for happy sales people but the unexpected increase in commission expense could negatively affect your bottom-line. A profit/margin oriented commission plan may help you manage the bottom-line and keep your sales people focused on profitability.
Del Yamaki Administration, Commission Plan, Uncategorized economy, gross margin, profitability, quota, sales comission
It’s March and we’re coming up to the end of the first quarter of 2009. Is your Sales Compensation Plan for 2009 in place? It’s surprising how many well-run, best of breed companies fail to put their sales commission plan in place in a timely fashion or fail to properly communicate how their sales people will be compensated.
I’ve been doing implementation of incentive compensation systems for over 12 years, across over 30 different industries, and a range of small, mid and large companies. There’s no pattern or type of company, but you hear so often even this late in the year how the sales commission plan hasn’t been designed or isn’t ready. Meanwhile, sales people are still selling, unsure how their efforts will affect what ends up in their pockets.
During the first quarter of a year, we sometimes get calls for assistance on making plan changes. There’s always some percentage of these calls where the customer will say, “I need help with changing our sales commission plan, but I don’t have all the details yet. All I know is that we’re doing something very different and complicated, but it hasn’t been finalized yet. Can you help me?” My answer, “..sure, please call me as soon as you know what the details are.”
I’m always amazed that in spite of the obvious morale issue, sales people continue to sell even when they don’t have a comp plan in place. You never hear about sales people going on strike because their sales commission plan wasn’t in place or that a company’s revenue is down because they weren’t ready with the new sales commission plan at the beginning of the year.
Del Yamaki Administration, Communication qcommission, sales commission, sales commission plan, sales compensation plan
