A new commission plan for Customer Service Reps

Typically, commission programs are used for revenue generating roles. If your Customer Service Representatives are in a position to influence the customers to buy more, to retain them, to cross-sell them, or otherwise to generate revenue, then this can be a great approach. If they are more fulfillment, helpdesk or troubleshooting oriented, a bonus program might be more appropriate.

If you are just starting out with a commission program for people already on an all-base plan, then funding the commissions will be an issue. For variable pay to really motivate behavior, a number of conditions have to be met:

1. The eligible employees need to have the ability to make the results happen themselves, or as part of a very small team (2-6 people).
2. You need to be able to establish a productivity standard -- know how much you expect the employee to "produce" (/sell/retain/collect).
3. There needs to be true at-risk pay so that the eligible employee will not earn their full market value unless they meet the productivity expectation and earn the full target incentive.
4. There needs to be upside for over-performance. This is the counter-balance to the risk you are expecting them to assume in #3 above. Without the possibility of better-than-expected rewards, the risk isn’t worth it. This means that your top performers (top 10% or so) should earn a small multiple of what is earned by on-target performers (1.5 – 3 times as much, for example).
5. You need to have, or be willing to hire, people in the role with an appetite for the rewards and risks of such a compensation arrangement – willing to bet on their own ability to make a difference, and excited about the prospects.
   

Of course you can move to such an arrangement gradually over time, holding base constant, adding a few percentage points of base to the incentive at target each year (5% or so), improving your goal setting abilities, and learning to manage under a commission program.

Hiring your first sales person

For most small companies, your first sales hire is hard to do well. You don't have a sales leader to help you confirm you have the right skills and temperament for the job. You're not sure what to expect in terms of productivity. And you don't have a pay structure or comp plan to tell you how much this person should earn, what kinds of special arrangements are needed (car, expense account), etc.

We'll leave a lot of that to your other advisors and focus here on the compensation piece. Here are the basic steps you need to complete to arrive at the right comp plan for your new hire:

1. Your first step is to determine a reasonable level of total compensation for a sales person in your business -- that's what their W-2 says at the end of the year. This is undoubtedly tied, in the thoughts of company management at least, to how much the person should be able to sell in that first year -- the cost needs to be associated with a reasonable return. You'll get better at that as time goes by, but you'll have to start with some kind of working assumption based on others in your industry, leadership's experience in selling your products or services, even to a certain degree the perspective of your top candidates for the role and/or a recruiter who may be helping you to fill it.
2. Next you need to decide how the risk will be shared -- how much of that target total compensation will be in a fixed base salary and how much in the incentive at target. For early stage companies, the fixed portion may be relatively low, even 30% to 50% of the target total compensation. However, if you are trying to attract a well-established resource to bring their network, skills and experience to your company, you may have to offer a higher base since their choices include many with less risk.
3. Now you know how much the incentive at target will be, so your next step is to be very clear about WHAT you expect your new sales person to PRODUCE per year. This is usually measured in revenue dollars, but may be measured in units sold or even gross margin dollars in some industries. Whatever the measure(s), you need to design a plan that delivers the target incentive amount for getting to the productivity goal. This is most typically communicated as a commission (to calculate the rate, divide the target incentive by the productivity expectation). There's more to consider in designing the payout table than this article can address, such as threshold levels of performance (below which no incentive is earne), acceleration and deceleration in payout rates at over-goal levels of achievement, etc. You will also need to be clear about payout timing (monthly, quarterly, etc.), and measurement periods (independent or year-to-date).
4. Your last design step is to check the plan's appropriateness across a broad range of possible levels of productivity, and be sure you're comfortable with both the cost to the company as it relates to results and the income level for the sales person. You will very likely make some kind of adjustment after this review, which should probably involve someone from your Finance group or the company's owner.
5. Once you feel you have the right design, your next step is to carefully document the plan in a Plan Document to be signed by both the sales person's manager and the sales person. Here, you should probably ask for a review by your legal counsel.
6. And finally, determine how you will administer the plan - where the data will reside, what reports will be run, who will do the initial calculation, who will review and approve it, and how the information will be communicated to your payroll processors.
   

Then after you've been living with the plan for a few months or quarters, have a look again to see if it's meeting your needs. Always include a clause in the plan document claiming the right to adjust as needed, then don't adjust during the plan year unless you've got a BIG problem. But do consider adjustments each new plan year. As your business grows and changes, the perfect sales comp plan will also change.

Sales Manager bonus plans

The bonus program that is the best one for your business depends on what your reasons are for offering the bonus. If you are looking for a way to provide additional income for your sales managers in years when it is affordable, and to keep them at least interested in the overall company performance, then a year-end bonus tied to overall company results may be the right answer for you.
However, if you want to motivate and reward for results they themselves are capable of generating, giving them meaningful at-risk pay to "penalize" those who don't deliver and exciting upside to reward those who really ring the bell, then you might want to consider tying their variable pay more directly to results they can personally control. A more typical sales management variable pay plan would tie a fixed value incentive opportunity to achieving a sales or gross margin goal, with ...

...no payout for performance before some threshold value (50% - 90% of goal depending on goal setting accuracy and company/market maturity),

...increasing (but linear) payout between the threshold and the goal,

...accelerated payout (more $/percentage point of goal achieved) for over-goal performance, and

...deceleration or a cap at a very high level of performance (110% - 150% of goal, again depending on goal setting accuracy and company/market maturity).