If you employ salespeople to sell your company’s products and services, it is more than likely that you have a sales commission plan in place.
If you do and you want to test whether or not your sales commission plan is fit for purpose, there are 3 simple questions you should ask yourself.
The answers to these questions will inform you if your sales commission plan is what it should be, if it would benefit from adjustment or if you need to pull it apart and start again. The three questions are,
Question 1: Is your sales commission plan aligned to your organisation’s financial objectives?
We’ll start with something so obvious that it often gets missed. Are you rewarding people for achievements that directly contribute to the financial objectives and targets laid out in your organisation’s business plan?
For example, if achieving your annual gross profit target relies on a balanced mix of products and services being sold, is this reflected in the plan, are there certain products that you want to sell more or less of?
Aligned to the product mix theme, is your plan operating on a flat percentage of sales value (revenue) or does it reward as a proportion of the profitability of the sale. If it is the former, it is literally costing you more (in terms of commission payments vs profit ratio) to sell your less profitable products.
However, the most important thing in aligning your plan to your financial objectives, is to check if it’s possible for you to pay out 100% or more of your commission plan budget without achieving your organisation’s financial targets.
In other words, could you max out your commission plan budget without hitting your profit target? You should check this at an individual, team and overall company level.
Question 2: Does your sales commission plan promote the correct behaviours?
If your business sells high value and/or complex products with a long sales cycle, it’s probable that the accuracy of your sales forecast is important to you. If it is, have you linked the accuracy of sales people’s forecasts to the payment of their commission?
On a similar theme, but extended to a wider scope, you may be an organisation that struggles to get its sales people to manage their Customer Relationship Management (CRM) input to the standard you want them to.
This could include anything from keeping customer contact records up to date, through to ensuring sales opportunities are staged at the correct point in the sales cycle. If this is an issue for you, have you taken steps to link the payment of commission to the quality and accuracy of their CRM input?
A final point on this section is to check if your sales managers are rewarded with exactly the same commission plan as the people in their teams and consider if this is the correct thing to do? Are there points of integrity, such as ensuring the correct product is being sold to the right customer for the right reasons, which mean your sales managers should be rewarded differently?
Question 3: Is your sales commission plan clear, documented and understood by all?
If you do run a sales commission plan (and if you have read this far I’m presuming you either run or are rewarded by one), have you ever received a complaint from a participant of the plan.
The answer to that question was “yes” wasn’t it?
In my experience the majority of complaints (or to more accurately describe them, disputes) about sales commission plans arise from two sources.
The first is when the plan is changed mid-year; when this happens it is nearly always because the points raised in “Question 1” (alignment to financial objectives) were not addressed in the plan’s original design and a panic measure has been put in place to address a budget issue.
The second is when the plan is not supported by a governance document. Moreover, the time and effort has not been taken to ensure that the plan’s rules are clearly documented and understood by everyone participating in it. These rules could include, thresholds, accelerators, bonus triggers (the aforementioned) product mix and the behaviours we covered in Question 2.
Writing a governance document for your sales commission plan, explaining all of its moving parts, the rules and even producing a frequently asked questions (FAQ) section will minimise the instances of future disputes.
More importantly, it will test whether or not the design of your sales commission plan is robust and fit for purpose. If there are gaps in your plan, writing the governance document will find them before you launch it, so it’s worth the effort.
Getting it Right
The premise of running a sales commission plan is that you are employing salespeople within a risk/reward culture.
A good sales commission plan will align to your organisation’s financial targets and objectives, reward not only sales achievement, but also the correct behaviours and be clearly understood by all those participating in it.
So, when you get a chance ask yourself the three simple questions outlined above and hopefully you can answer them in this order,
- It is
- It does
- It is.
If you can that’s brilliant, if you can’t, you’ve got some sales commission plan redesign work to do.
John Cunningham