Sales Commissions...A Tool For Success

While commission-based compensation isn’t the only—or even necessarily the best—way to compensate a sale force, it is predominate in most industries that rely on a direct personal sales force to market their products or services. The basic problem with many of these commission plans is that they are expected to not only encourage the sales person to produce, but to shape other behaviors as well. And that’s where the problems lie.

A successful sales commission plan should possess three characteristics. If yours is lacking any one of them, there may be problems. Here are the three basics:

1. The plan should offer an immediate positive reward to the salesperson for doing well the things you want done well.

2. It should be clear and simple to understand.

3. It should be relatively free of influence from factors outside the salesperson’s control.

A sales commission plan based on these three principles will reward the company by doing what it's supposed to do, encourage profitable selling efforts by the sales force.

Sales De-motivators

Sales people operate under the gun most of the time. They're pressured to produce by the company, by their families, and by their own egos. Many of their customers see them as adversaries. Most of the rest of the staff sees them (at best) as overpaid necessary evils who specialize in lunch.

Large segments of society still aren't totally comfortable with people who make their living through persuasion. One of the few positive aspects of the salesperson's life is his or her commission compensation. Since a positive attitude is essential to successful selling, we need to make sure that our compensation system provides that positive reinforcement.

Start with the immediacy of the reward. If the behavior which produced the sale results in a direct reward for the salesperson, they will do it again. The sooner the reward comes, the sooner the salesperson will repeat whatever course of action produced the reward. It's simple. It's Pavlovian. It works.

The reward should also be positive, not negative, in nature. Be sure that the compensation system adds to the salesperson's income when he or she succeeds. A structure which instead removes income for failure to produce also removes all incentives except fear. And fear is a short-lived motivator with ultimate negative results for the company.

Send A Positive Message

Make sure you’re rewarding the single behavior you want repeated. Are you interested in growing repeat business from existing accounts? Or bringing in new accounts? Increasing unit rates or moving unpopular inventory? Any one compensation system can’t reward the actions that produce each of these very different results. Mixing goals with different commission rates in the same plan, for example, leads only to the sales force spending time on how to outwit the plan to their own ends. Being creative people who live by their wits, most sales people will soon find the best “angles?in every plan. Be sure that your compensation system sends the exact message you want the sales people to receive.

The salesperson needs to know--as precisely as possible--what the rewards are going to be. The compensation system, therefore, needs to be simple and clearly stated. Action "A" yields reward "B". Anything much more complicated than "A=B" diverts attention from selling activities into calculating (or guessing at) the compensation. Any system which requires extensive explanation also introduces an element of mistrust into the company-salesperson relationship. After all, haven't we been taught to read the fine print for a reason?

Trust Vs. Quotas

The salesperson needs to be reasonably certain that once the reward has been earned, no outside factor can keep it out of his or her pocket. This includes changes in the rules of the system, fluctuations in market conditions after the sale, and, most of all, subjective decisions by company management. "A=B" quickly loses its motivating power when it sometimes becomes "A=B-1" at the whim of the sales manager. This is certainly not to say that a salesperson’s income needs to be guaranteed. What they must know, however, is that no one is going to change the rules after the game is played—and take away income which they justifiably feel they have earned.

A frequently-encountered commission system which violates all of these rules is one basing the commission rate on achievement of a budget or quota set by management rather than the sales person. No matter how you try to persuade the sales person to “buy in?to their quota, they will always perceive it as a surreptitious way for the company to take away some of their justly-earned income if they fail to achieve the quota—an action they believe motivated by the company’s desire to increase profits by decreasing commissions.

These plans also deny the sales person an immediate reward, since they must wait until the end of the quota-producing period to learn what they’ve earned for each sale. The longer the period—which frequently lasts three months or even a year—the greater the time between the sales person’s action and the reward for that behavior. Most good sales people I know are energized by the immediate gratification of selling; positive customer feedback, definitive completion of a long selling process, closing the sale. Delayed gratification simply de-motivates them.

Shortening the quota period to move the reward closer to the sale would seem to be the logical answer to this problem, but since it’s impossible to figure out what an individual sale earns before the sales person works on it, the commission plan can’t have a positive effect on their efforts.

The other major disadvantage to monthly or weekly quotas is that they tend to encourage quick-fix sales, which erode pricing standards. Even worse for many companies, short quota periods may discourage development of long-term relationships with larger accounts, which necessarily take effort over an extended period to achieve. It’s tough to keep your eye on long-term goals when the size of this week’s paycheck is set by today’s sales.

Finally, quota-based commission plans are almost never simple and they’re invariably subject to forces outside the sales person’s control. The rate is “X?if you achieve your quota by this date, but “Y?if you reach it afterwards, unless this percentage of your sales are at that average price point in which case your commission rate will be “Z.?In fact, plans such as these are strong de-motivators to the sales person who misses the company-imposed deadline by a day or the quota by a dollar. The negative feelings are compounded when the shortfall is due to events like charge-backs or shipping snafus which are beyond the sales person’s responsibility.

Sales people aren't tender flowers that need to be coddled and protected. They are tough entrepreneurial risk-takers who are highly motivated to succeed for themselves and their companies. We should make sure that the way we compensate them encourages their success.

Copyright 2000 Donelson Sales Development Associates, Inc.