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What to Consider Before Killing a Commission Plan

From time to time an article appears in the press that argues it is inappropriate to pay sales people through commission because these kinds of plans create more problems that they are worth. Such an article recently appeared in Forbes (see “Death of a Sales Commission” by Susan Adams, April 19, 2016, pp 58, 60; www.forbes.com). We have no direct knowledge of the company situation described; however, we found it interesting that the decision to move from salary plus commission to 100% salary was made without any apparent consideration of an interim step, for example, salary + a team sales bonus. The latter, in our experience, is a common practice in the HVAC industry.

Near term, the article reports that sales results improved; presumably the improved results paid for the increase in fixed costs, i.e., higher salaries which are the result of adding salary plus the average of three prior commissions earned. No mention is made of the likely consequences of a future downturn in business, i.e., sales go down, compensation costs do not and, therefore, to reduce selling expense headcount is proportionately reduced.

With that background in mind, we thought our readers would find it useful to have “refresher” information about factors to consider prior to “killing” the use of commission.

SALES ENVIRONMENT

The cultural and behavioral aspects of the sales environment in which sales reps operate have implications for the use of a commission plan as described below:

What to consider about sales reps’ perspectives…and what the commission plan communicates about selling behavior:

  • View of business opportunities…opportunistic; follow the money; deal oriented; short cycle selling focus
  • Feel about their sales role…they are the product; skills and efforts are the biggest determinant of the sale
  • Go about their job…highly competitive; love recognition for winning
  • Respond to company priorities…customers come first
  • Are monitored and coached…little direct supervision by the field manager
  • Are measured and evaluated…making the sale comes first
  • Are retained…not a lot of non-financial “glue”

SELECTION FACTORS

With that perspective in mind, the following four factors should be considered when making a decision about the continued applicability of a sales commission plan in a particular business environment. As indicated in the table below, if the majority of the responses to the questions associated with these factors are “yes”, the use of a commission plan is then directionally correct.

Factor/Key Question

  • Sales role – Is the degree of influence over creating the sale seller driven (vs. company or team driven)?   Yes = commission; No = other incentive
  • Industry practice – Are comparable jobs in the industry (i.e., direct competitors; competitors for talent) paid sales incentive through a commission plan? Yes = commission; No = other incentive
  • Stage in business (or product) life cycle – Is the business (or product) relatively young, in start-up mode with limited resources? Yes = commission; No = other incentive
  • Sales/customer relationship management – Is selling transaction oriented? (Customer not interested in building a relationship) Yes = commission; No = other incentive