The top 3-4 reasons why management, within a mature company, may want a non commission plan are the following:
1. Mature companies with successful business strategies and an efficient go-to-market approach should, over time, see sales person pay go up with the labor market while sales productivity goes up faster. This means that comp % sales goes down. You have more control in continuing to align pay with the labor market and productivity with company expectations using a cost-of-labor plan (not a cost-of-sales = commission plan). If you have a commission plan, you are stuck communicating a lower commission rate every year (or at least every few years), which makes sales people nuts.
2. Market leaders with strong brands and value creating products have the right to claim the value they have created over time. This means they have the right to assign a sales person to a territory/book, expect them to maintain and grow it, but not expect to pay for the size of the territory/book in a linear fashion. So a person assigned a $6M territory should make more than a person assigned a $3M territory, but not twice as much. It is much more straightforward to manage the dampening of the comp delivered to keep that relationship non-linear in a quota-based cost-of-labor type plan.
3. True commission plans take a lot of tinkering and often involve a fair amount of discretionary adjustment, complicated mechanics and side deals. This becomes unwieldy in a significantly large sales organization. How fair can management be with such a system across 700+ people?
And if you'll allow me a fourth:
4. In a complex sales model with multiple people involved in the sales process by design, a commission plan does end up double-paying when you offer credit to multiple individuals. A quota bonus type plan will allow you to directly manage your cost of comp as you hold the right people accountable for their contribution to securing the business.
Monday, December 08, 2008
Monday, December 01, 2008
How do you know what the right commission rate is for your industry and area of the country?
Answering this question is harder than it looks. The answer depends on the nature of the selling role, the level of maturity of the business, and the cost structure of the company.
At its most basic, a commission rate is derived by taking the total compensation you intend to deliver and dividing it by the amount of sales you expect. The result is the commission rate. Many companies then add motivation-enhancing mechanics such as acceleration at high levels of achievement so that commission rates may increase over the course of a quarter or year. But the starting place is those two key ingredients: the amount of variable pay you would like to deliver through the commission, and the amount you expect a person to sell in order to earn that much.
To determine the amount of money you want to deliver through the commission you must decide what the total compensation should be for on-target performance, and divide that appropriately between any base pay you will guarantee and the variable piece. In more mature companies it is more likely that there would be a substantial base pay level. Also, for very skilled selling roles, it may be necessary to offer a meaningful base pay in order to attract the talent you want into the role. And, in general, the more direct control the individual contributor salesperson has over the sales results on which they are measured, the more appropriate it is for them to have a high level of variable pay and a low level of fixed pay. Conversely, if the sales are made by a team, or if the brand is strong, or if a strong marketing function guarantees a steady flow of warm leads to which the salesperson must simply respond well, then a higher base, lower variable, and lower upside for over-performance arrangement would be appropriate. So that's a very high level overview of some of the issues around determining the total variable pay to be delivered through the commission, your numerator in determining the commission rate.
For the denominator, the total sales you're expecting from them, this is a function of how you are selling, the level of skill required, the characteristics of the market into which they sell, any support systems you have in place, the effectiveness of your competition, and your basic selling strategy. Knowing what your competitors expect of their sales people might be helpful, but do they have a teamed inside/outside pair, or only a Field sales person with no inside resource? Do you have a strong marketing department and a great lead flow while your competition expects their sales people to generate their own leads? Much goes into determining a productivity expectation for a salesperson, but this must be estimated, and will serve as the denominator for your commission calculation.
While it seems like a simple question, a lot of thought must go into getting to the right answer.
At its most basic, a commission rate is derived by taking the total compensation you intend to deliver and dividing it by the amount of sales you expect. The result is the commission rate. Many companies then add motivation-enhancing mechanics such as acceleration at high levels of achievement so that commission rates may increase over the course of a quarter or year. But the starting place is those two key ingredients: the amount of variable pay you would like to deliver through the commission, and the amount you expect a person to sell in order to earn that much.
To determine the amount of money you want to deliver through the commission you must decide what the total compensation should be for on-target performance, and divide that appropriately between any base pay you will guarantee and the variable piece. In more mature companies it is more likely that there would be a substantial base pay level. Also, for very skilled selling roles, it may be necessary to offer a meaningful base pay in order to attract the talent you want into the role. And, in general, the more direct control the individual contributor salesperson has over the sales results on which they are measured, the more appropriate it is for them to have a high level of variable pay and a low level of fixed pay. Conversely, if the sales are made by a team, or if the brand is strong, or if a strong marketing function guarantees a steady flow of warm leads to which the salesperson must simply respond well, then a higher base, lower variable, and lower upside for over-performance arrangement would be appropriate. So that's a very high level overview of some of the issues around determining the total variable pay to be delivered through the commission, your numerator in determining the commission rate.
For the denominator, the total sales you're expecting from them, this is a function of how you are selling, the level of skill required, the characteristics of the market into which they sell, any support systems you have in place, the effectiveness of your competition, and your basic selling strategy. Knowing what your competitors expect of their sales people might be helpful, but do they have a teamed inside/outside pair, or only a Field sales person with no inside resource? Do you have a strong marketing department and a great lead flow while your competition expects their sales people to generate their own leads? Much goes into determining a productivity expectation for a salesperson, but this must be estimated, and will serve as the denominator for your commission calculation.
While it seems like a simple question, a lot of thought must go into getting to the right answer.
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