What is the best sales commission structure?

Wendy, Jim makes a lot of good points. I would add a few:

1. What business metric do you want to tie sales compensation to? For example, is it more important for your business to generate backlog or immediately recognizable revenue? If it's the former you might tie compensation to bookings, regardless of when those bookings will be recognized as revenue. If it's the latter, you might tie comp to revenue.

2. In terms of creating the right mindset in the sales organization, the most important thing is to make sure that the sales people feel like they will make a lot of money. It's important that they see examples of that success at the company already. You want your sales people calling all of their friends to say "I'm making so much money at this company - you have got to come work here." That often has nothing to do with structure.

3. I'm a big believer in using "game psychology" as part of our sales compensation efforts. There are no doubt a certain set of business objectives and metrics that you care about that you can create contests around (e.g. number of new customers, top performing rep based on quota achievement, highest quarter to quarter growth in quota...). Sales people like to win. They also like to be recognized as winners and most importantly to be comped for winning.

Hope that helps a little bit.

Scott

The "Best" is a tricky proposition. This would tie into your organizations culture. However, in crafting a compensation model there are, what I would consider, best practices.

1- As outlined above in previous posts from Jim, Scott and Richard, driving the key behaviors that will support your business model and business needs.

2- Here is what we often forget. Keep it simple and easy to understand for the Sales Force. Complication, ambiguity, etc... will just create chaos, distrust and detract from the focus you want from the team.

3- Keep it results oriented. The business doesn't get paid for trying. It gets paid for doing. The relationship between the Sales Team and the Business should be on equal ground. If the Business makes money, the Salesperson makes money.

4- Realistic goals but ones that you have to work for to drive performance with rewards relative to the value.

Then sell your salespeople on the plan by showing how it benefits them.

It is a partnership and should be communicated in that fashion.

Couple of things that worked for a small co I worked for:
1. Measuring sales people against their own achievements in the past as against each other.
2. A good mix of base pay and a commission plan.
3. Posetive reinforcement in a form of short term rewards.

http://www.oneclickcommissions.com/sales-commission.html
sales commission

I hold a generally unpopular opinion on this subject: that being that salespeople should be well compensated for their efforts on behalf of the organization, but they should NOT be commissioned, at all.

Nevertheless, if you insist on a commission program, the commission should be based on a couple of factors:

1. Throughput sold (that is, revenue less only truly variable costs -- not quasi-variable costs, such as expenses allocated to cost)
2. Selling to the firm's calculated product mix that results in the highest Throughput per constraint-hour (T/C-Hr)
3. Minimizing disruptions to production (no storming onto the production floor seeking or demanding special treatment for their orders or their customers)

Some of these metrics may be new to some readers. If you have questions, you may find some answers to your question by searching http://www.GeeWhiz2ROI.com, or feel free to email me at rcushing@GeeWhiz2ROI.com.

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we determine the sales person cost of doing business and our roi and looks at a draw to commission to bonus structure. We also use industry benchmarks from all industries vs staying too industry specific. We cross fertilize that way . We have a reward and recognition strategy above money as well

Wendy,

You're working for a "manufacturing company selling precision parts" -- what do other firms in your space and local market do in the area of commissions?

Some of your best potential hires could come from the competition, so you'll need to make sure that your commission plan is competitive.

Robert

Commissions are mostly based on Value Added. Again, the commission rate varies widely, from 4.5 percent to 14 percent, depending on the size of the company and the recurrence of the sale.

http://www.nirvaha.com/sales-commission.html

I might be a bit different here since my company's entire compensation structure is based on commissions. We don't pay salaries to our sales reps - we simply take the net profits to the company and split those 50/50 with the sales rep who brought in the deal. These payments are vested from day one and last as long as our agents are "active agents" with the company.

First, you ll need to set your KPI's: Budgeted revenues, new customers, new markets penetrated, profitability margins, etc. Once you do that you sit with your employee and discuss the feasibility of the KPI's. Try to set your key performance indicators optimistically. It's crucial to make them challenging but achievable targets.
Now, a commission scheme should look something like:
First, he has a salary of $x. Then given all targets are met, he will get for example 2% of the net profit after tax of your yearly sales. It's crucial at least in most businesses to give commission on Net Profit rather than Total Sales, because high sales do not always translate into profitability if expenses are overlooked by employees.
In the event that targets are exceeded by the employee, then salesperson could get 2.5% commission instead of 2.
What if employees underachieve?
In my company, if a salesperson doesn't meet the KPI's I assess the reasons for it very closely. If he/she did their best and there was some sort of force majeur, then they get paid their full commission 2%. If the drop in KPI's is due in my view to reasons that could have been avoided or solved with a bit of dedication, then minimum bonus if any is rewarded.
Hope this helps

I would like to add one important aspect of defining a sales compensation plan for any industry or company.

1) What is the company's goal.
2) Does this plan directly related to the goal or increases the success rate of achieving the goal.
3) Does the sales reps goal of achieving more revenue to him also directly increases the goal achievement of the company.

This is the most crucial part of the compensation/ commission plan which will have a win - win situation for both. And measuring the plan's performance using tools like www.easy-commission.com will guide to get feedback on it and tweak it to optimize the plan in the future, also evaluate the performance of the reps. Create hundreds of reports to see the progress about the reps, commissions, plan, territory, month wise etc.

Easy-Commission is a Sales Performance Management (SPM) Tool, where, after EIM and CRM, SPM is the way forward for any sales organizations, is the view of the research company " Ventana Research". Please see this report for further information on this message.
http://www.ventanaresearch.com/researchCategory/SalesMarketingPerformance.html

One simple suggestion is to have a feedback review of each of the sales rep and find out what they think about the plan. Is the combination of plan is (a) Excellent (b) Good ( c) Poor.

Based on their feedback you can either continue or change the plans.

The article is very helpful! Thank you for posting it! Personally, I had some problems figuring out how to organize my commission reports. After plenty of research I found this program that gives me templates for that very purpose, then quickly and painlessly converts my excel documents into pdf so I don't have to do it manually (which would end up taking aggravating hours upon hours). It provides my business a simple way to make individualized statements for our business associates, taking our commission reports and seamlessly transforming the rows and columns of information into a professional document. Check it out here.

What ever commission structure you choose, you need www.easy-commission.com to implement it. Using this your sales rep builds trust on your company, as the calculations are digital and not manual for one thing and it save lots of time and money for your company.

Plus you can try all the three plans for three different reps and see which one is a successful one say after three months of operations.

Then you can follow the best commission plan. Hope it helps you :) Send me email for any more help

Krish@easy-commission.com

http://www.easy-commission.com/whatisec.aspx Or
www.qcommission.com
( the enterprise version of easy-commission.com )