How to Design Effective Sales Commission Plans

Most integration companies probably desire more variation than they actually have in typical sales commission management systems. Many current plans are based on target gross profit margins in an effort to keep things as simple as possible, but this may not be the best thing for the company or sales team.

Well-designed commission plans must consider the “landscape” of sales at your company. A good commission plan is one that is the right fit for your company and rewards your sales team for bringing in business. Write down your thoughts and ideas so the plan flows easily into a written document you and your team can understand and live with. A few key questions to ask:

1) What are the kinds of sales you want your team to champion?

2) How do you balance what a sales person is paid (salary/benefits) with respective commission levels?

3) What are the sales targets and goals most important to your company? (These should be definable and quantifiable–easy to measure. For instance, new business versus existing customer sales; sales targets per market; gross profit to sales targets; go-no-go qualifiers; reward based on the length of recurring contracts such as one, three or five years.)

4) How can you create reward levels based on specific business goals?

  • A. Quotas for new business and specific types of new business sales: i.e. outright sales (break this down to different systems: security, fire, commercial, residential, etc.; leases; RMR/RAR; take-overs.)
  • B. Quotas for recurring business and within this, specific types of recurring business, contract term lengths, new versus a re-sign.
  • C. Gross profit targets based on different types of sales or markets.
  • Combinations of specifically defined targets for a, b and c above. You can drive business to (b) if the sales plan has a “kicker” for a new business sale with an RMR component. For instance, an outright sale with no recurring revenue contract will pay less commission for the outright sale than one that includes both components.

5) What are the goals, consequences, incentives, re-evaluation and re-alignment criteria?

Companies large and small succeed when they offer multiple plans that target the sales to the company and for the type of markets and sales their personnel are selling to. An example of this might be the following: a sales person focusing on medium to large commercial sales has a different sales cycle, marketplace and product suite to sell than someone from the same company selling to residential or small commercial markets. A sales person focused on the medium to large size commercial market is likely developing relationships with multiple entities to participate in bids, negotiated bids or negotiated sales. This is likely to be a longer sales cycle with gross profit ranges a bit broader and with the potential for terrific change order business post sale, in addition to ongoing support services. A person selling to the residential or small-business market is focused on generating sales volume and typically has more contained product and service lines and can close business more quickly (shorter sales cycle) thus impacting cash flow more efficiently for the company.

 

Tailor the plan for best results

One plan may reward based on gross profit targets that are defined for bid market, negotiated bid and negotiated sale as an example. The residential or small business plan may be based on volume first: a) “x” number of sales per a given time period must close before a commission is earned or b) a specific dollar volume of sales is required before a commission starts to be earned within a given time period, or c) must have an RMR component to earn a commission. The commission may be a flat dollar amount.

Other plans may reward local sales people and provide an “override” to an account manager who is responsible for oversight of the total account. This happens often with large-scale geography customers who provide volume sales to an organization and need daily account management.

Still others may not start to pay a commission until a specific dollar amount of sales or gross profit dollars is earned and then gross profit percentage targets determine the commission amount to be paid. This may be due to the markets the person sells in or could be because the salary of the sales person in that location is higher. We do see plans where there is no base salary and higher commissions are paid on gross profit targets or a percentage of the total sale, sales with RMR paying more than those without, etc.

When an organization has different commission plans, it is easier to help motivate and reward a variety of sales people for the business they bring in. Sales is not easy an easy career–if it were, everyone would do it. Pressure is tremendous and competition is everywhere. Designing plans that target specific sales types, markets and business you want is great. Being able to reward different sales people according to their experience and ability is even greater. Establishing a base plan that can be used for a variety of sales people and being able to customize it as needed is a great motivator. A sliding gross profit scale is one way to do this. Gross profit margin targets are established and at predetermined GP levels a corresponding payout is established. An example might be something like this:

 

Gross Profit % Commission %

22-24 2

25-28 3

39-30 4

31 5

32 6

33 7

34 8

35 9

 

You can even create plans that include sliding scales based on the type of sale: new business; existing; recurring revenue; or target markets such as corporate, hospitals, finance, government or others.

There are many variations and those that work best and attract the best sales people marry the goals of the company to reward the team for reaching those goals through good sales. As a dear friend often reminds me: ‘Sales are life blood—cash flow is King—the rest is doing a great job for your customers!’

 

 

Tracy Larson is the president of WeSuite LLC in White Plains, N.Y.; www.wesuite.com.

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