Here at Sales Cookie, we help our customers automate their commissions using software. So far, we’ve analyzed hundreds of commission structures. Some of those commission structures are quite complex, have many components, or implement exotic rules. Others are more straightforward and tend to follow well-known commission recipes. Some of those incentive programs are remarkably successful and propel fast growth. Others are more confusing or can be difficult to explain. Here are our top 10 recommended best practices to streamline your commissions based on our detailed analysis of over 100 commission structures.
#1 – Pay for individual results when individuals drive success
There is only one justification for paying commissions: motivating your sales force to deliver stellar sales performance. For this reason, it is especially important to define “success” (is it based on revenue, profitability, growth?) and to identify who within your sales team drives this “success”. Do groups of people work together to close deals? Or are reps selling directly to customers? If success is driven by individual contributors, commissions should be paid based on what reps do, and actions they perform. In this case, make sure your goals are not based on collective, territory, or team metrics. For example, Joe’s commissions should be based on deals directly closed by Joe (not deals closed within Joe’s territory).
#2 – Encourage collaboration and teamwork when it makes sense
In other sales environments, sales do not happen unless reps work together to close deals. In this applies to you, your commission structure should promote team synergy and take into account each contributor’s involvement. For example, reps could be paid 8% of revenue (because they influence each deal’s amount), while their account manager could be paid a flat $500 (because their role is that of a facilitator whose effort doesn’t depend on the deal’s size). If a higher degree of collaboration is required to close deals, consider splitting commissions between roles, or defining team-based goals (ex: shared quotas). Also, think ahead, and make sure you have a way to mitigate situations where an individual gets sick or quits, negatively impacting all members of the team. Plan Bs do matter when using shared commission models.
#3 – Pay for results directly under the seller’s control
Sometimes, reps get lucky and land juicy deals through sheer luck. Also, if you have renewals, it is common for reps to be credited with deals without getting involved. When reps actively work to close a deal and demonstrate contributing activity, it makes sense to pay a commission. Otherwise, the sales event should not be commissionable because it is not under the rep’s control. Note that we are not saying that commissions should be based on effort. Commissions can and should be based on results. However, only sales which derive from direct and observable action should count. Allowing commissions to be paid based on luck (or through passive “vesting”) will hurt you in the long term, because your reps will feel this is not a fair environment. In short, if there was no action, there should be no commission.
#4 – Adjust commissions based on sales aggressiveness & sales impact
If you are selling auto parts, sales activity may be fairly routine, such as dealing with a constant stream of orders. If you are selling actual cars however, each sale is more significant, and requires a higher degree of involvement from each rep. For this reason, commission rates should be higher. The more aggressive your reps must be, the larger the commission should be. The more impactful the sale is, the larger the commission should be. This helps ensure your reps are properly motivated to close deals which are riskier or require more energy. This rule may also be applied to sales to new customers vs. to existing customers. Think in terms of risk, level of involvement, and impact.
#5 – Pay commissions as soon as possible
Many organizations choose to pay commissions only when they get paid. This is a workable structure, and sometimes a necessary one (ex: because you receive payment incrementally). At the same time, commissions will feel disconnected from sales, especially if customers pay months later or often fail to pay. From a rep’s perspective, it can also be a bit of a nightmare. Your reps must now track which deals closed months ago, which ones have been paid, which ones are still pending, etc. Do you want your reps to oversee collections? One alternative is to pay commissions upfront (when deals close), and claw back commissions when payment isn’t received. This requires you to vet deals properly so that only those with a high probability of being paid are marked as closed. This will streamline your commissions and motivate your reps to close more deals as they feel the immediate effect of commissions.
#6 – Use goal-based commissions to drive results
When designing a commission structure, you can use flat rates (i.e. pre-defined aka absolute commissions), or you can use attainment-based tiers. While setting goals is always tricky, commissions cannot be motivating unless you have targets. Your targets do not necessarily need to be sales targets (quotas). They could also be payout targets and specify how much you should be earning in commissions. However, just paying flat rates (ex: based on SKUs) without any target is not exciting, and it will not generate any extra sales motivation you are paying commissions for. Even an indicative goal is better than no goal.
#7 – Have no more than 3 metric per role
Your reps are trying to figure out which sales-related actions they should perform to maximize their commission payout. If you have too many commission components (more than 3 per role), you are sending a confusing signal regarding priorities, and making it a complicated game of chess. Also, each component’s weight should not exceed 20%, otherwise your reps will consider them meaningless. Keeping the number of metrics under 3 not only sends a clear message about sales priorities, it also makes your commissions easier to audit and improves transparency for your reps. In conclusion, your reps are too busy to deal with 5 concurrent goals or think about various weights when assessing potential commissions.
#8 – Include both downside risk and upside gain
The best commission plans avoid over-punishment while creating clear lines of demarcation between great performance, okay performance, and poor performance. The only way to do this is to provide some upside when delivering strong sales results, and a penalty when failing to meet standards. We recommend setting goals such that 20% of your reps exceed them, 20% fail to deliver, and 60% fall in-between. This also helps you keep track of who is doing well and who is struggling. We also recommend meaningful accelerators such as a 1.5x rate (or higher) for meeting goals, and 0.8x rate (or lower) for underperformance. You can decide whether the accelerator should be applied to all sales, or only sales exceeding goals. Both options are reasonable and motivating.
#9 – Match measurement periods to sales cycles
To measure commission-related sales performance, you have different options. You could measure sales monthly, quarterly, annually – and pay commissions based on this schedule. Or you could use a year-to-date, or quarter-to-date approach. To identify the best model, you must first analyze your sales cycle. For example, if you are selling cars, sales will happen within a very short period (days). However, if you are selling enterprise software, the time to close a deal may take much longer (months). By aligning your sales commission program to your sales cycle, you can define reasonable sales goals, and essentially bundle commissions and deals. Note that the attainment period can be different from the payment period. For example, you could use quarter-to-date attainment, but monthly payouts.
#10 – Make volume metrics your primary metric
It is very tempting to add all kinds of MBO goals when defining a commission structure. For example, you could add secondary goals based on customer satisfaction, profitability, interactions, etc. The way it will be perceived by your reps however probably is not what you expect. To them, those MBOs feel like distractions, or make them feel you are trying to nickel-and-dime them by adding various “factors” affecting their commissions. Also, it is going to be difficult for your reps to meet both revenue goals plus various MBO goals. For this reason, your primary metric should be a volume-based metric. Depending on the role, this metric could be a number of deals closed, total revenue, total profit, appointments booked, etc.
In this article, we shared some of our learnings from analyzing hundreds of commission structures. We listed 10 best practices which we hope will help you streamline your sales commission program. Please reach out or visit us online to learn more about how you can automate your entire commission program.