Commission an expense item or a sales motivational tool
April 24, 2017
I recently had a conversation with a CFO about the effectiveness of sales compensation plans. His take on it was that sales commission is just an expense item, period! I’ve met many CFOs who think that sales commission is just something they have to pay their sales reps for doing what they do. It is always too much money in their financial eyes, up to 14% of the revenue in most companies. Attitudes like that undermine the motivational aspect that a well-designed sales compensation plan can have on the sales organization.
I even had a company say that their commission expense was out of control, when the very effective sales compensation plan design encouraged the reps to double revenue 2 years in a row. Yes, I did actually mean, double revenue! The plans were designed with a clearly defined job role, a realistic quota, a very aggressive upside potential for excellence, so aggressive that the sales reps worked extra hard to exceed their goals and no cap. The cost of sales did go up, but that was planned for and signed off by the very CFO who was complaining. This company would not have seen that amount of growth without a commission plan with the lucrative accelerated rate focusing the reps in the right way.
There are many studies that evaluate the effectiveness of sales compensation plans and link commissions earned with revenue. When the plans are designed correctly they are aligned with the company’s strategic direction, the reps focus on the clearly defined goals, and the company will see affordable growth in the right areas.
But when a sales compensation plan is done wrong, nothing will work out. Follow these tips when designing your sales compensation plan to get the most motivation for your commission spending:
Align the sales compensation plan with the company’s strategic direction
Create quotas that are aggressive, yet realistic
Clearly communicate the sales compensation plan
Pay base salary appropriately for the job role
Provide full transparency on the attainment towards the quota
Have three or less measures and give them each a quota, goal or expectation
Allocate the incentive dollars based on strategic importance of the measure
Incentivize the desired behavior with a tiered rate for the most strategic goal
Designing a plan that drives the correct results is part of the solution. You need to pay accurately and on time too!