People hear what they see – Doris Day. 8 tips to interpret your new sales compensation plan quickly
It is the beginning of January and you just have been handed your new sales compensation plan document that needs to be signed today. At least you have a document explaining your new commission plan! That is much better than just having your manager tell you it.
As a sales rep, you know that you have to figure this new plan out quickly. It seems like each year management has you do something different. What you were working on last year may not be what you should be working on now, after all you expect plan changes. You can’t waste much time. You have prospects to call, new sales processes to follow and of course the latest new sales tools to understand.
Those prospects you’ve been nurturing in December may not yield you a big commission check based on this year’s plan. You need to figure this out quickly and maybe even change your prospecting focus. You have deals to close and bills to pay when you finally get that January commission check.
Does this sound familiar? You’ve been in sales for some time now and know the drill. Every year finance gets involved and the quotas go up and the rates go down because they think you’re paid too much. Don’t they know that your responsible for bringing in all that revenue and without hard working reps like yourself, the company wouldn’t exist. And the quota, is that some sort of joke or will they really have the marketing and new products to support that growth this year?
So now it’s time to really dig into the fundamentals of the new sales compensation plan to figure out where to spend your time to reach your goals. Here are 8 tips to help you quickly understand your new commission plans. By answering these questions and watching out for a few common changes that might go unnoticed for some time, you’ll be on your way to maintain your earnings level.
What is my new quota? Do I have one quota or several? Which is most important for me to focus on? Am I measured on achieving the annual quota or are there smaller milestones like quarterly or monthly that drives my commission?
Watch out for a quota that was set based on wishing and not reality and those that can be changed frequently! If this happened to you, prepare to negotiate your quota lower based on facts and not emotions or the tools and support you need to achieve the overly aggressive quota. Your quota should be aggressive yet realistic. If your quota is really unattainable it will negatively impact your earnings.
2. Sales crediting rules
What do I receive credit on? When do I receive credit for the order?
Watch out for a change in the timing of when the credit counts, like moving the credit timing from bookings to cash receipt. If you previously received credit at invoice but now will receive credit at cash receipt, this change will impact your cash flow by pushing the payment out by more than 30 days while the company awaits the payment of the invoice.
3. Sales value rules
How is the value of my sale determined? Is it based on the amount I closed the deal for? Is there a different method for calculating the value for different types of products? Can I calculate the sales credit value myself?
Watch out for credit value that is determined by finance through many calculations after the deal is closed. Make sure you understand how the value is determined so that you can estimate the value of the deal at closing. When there are complicated calculations used to determine the value of the sale it’s hard for you to determine how much harder you have to work to make that bonus. When in doubt, ask finance how much more do you need to sell to get that Q1 bonus! I know you’d hate to miss it by a few dollars and that does really happen!
4. Commission rates
Do I earn the same rate on everything or are some products and services earned at a different rate? What do I have to do to earn a higher commission rate?
Just because a product or service has a higher commission rate doesn’t mean you should concentrate on selling it! Remember your earnings is determined by the sales value times the commission rate. When you can concentrate on the sale with the highest possible commission payment!
5. Commission thresholds
Are there thresholds that I must cross before I start to be paid for my sales? Once I cross it, will I be paid back to my first sale? How often does the threshold reset? Should I hold this sale until the next reset?
Watch out for thresholds as some companies use them as a way to have sales reps pay for their base pay, which is actually like a 100% commission plan, one without any base. A common game you can play is to hold the closing of the sale until you know you have exceeded the threshold. I once analyzed a company’s data to find that one rep earned $90k more than another rep. Both sold the same for the year but the rep who earned more knew how to bring in the sale when he was making the most money. Some months he closed no sales because the threshold wasn’t crossed and other months he exceeded his quota and was in accelerators. Don’t you want to be like him!
6. Earning possibilities
What do I have to do to earn as much as I did last year? If I sell what I think I can, what will I make? I need to be able to earn $x, what do I have to sell to make that?
Watch out for overly complicated sales compensation plans and hooks that join two different things to determine the earnings. Calculate your earnings potential earnings should be easy to do by taking the sales volume you expect to sell times the rate plus any of the bonuses you should make. I recommend calculating your earnings at quota and at the sales volume related to quota from last year. If the plan is overly complicated ask for help to understand it. If enough of you ask for help interpreting the new sales compensation plan, the designers hopefully will get a message that the plan can’t be motivating if it isn’t understood.
7. Earnings caps
If I am really a top performer and blow out my number, will I get paid for everything? Will the commission rate change?
If there is a cap in the plan decide if you can stall the close of the sale to make more next year! If you are over the cap, you won’t get paid for it, so why close the sale now! Sometimes earning caps are related to deal size, often called the bluebird clause. You might be able to structure the sale in a different way to avoid the cap by breaking into several smaller orders or deliveries made over time.
8. Payment timings
Will I get paid the month after the sale was made? Will the company hold commission that have been earned until another event happens?
Watch out for commissions that are earned at one event like booking but not paid until another like cash receipt. If you earn it at booking you may have to wait several months to be paid your commissions and that impacts when you will have the money in your bank account. And if you leave the company you may be eligible for unpaid commissions so check with your lawyer.
Despite what your manager is telling you to do, follow what your commission plan is telling you to do to maximize earnings potential.