How much does a commission plan and goals affect outcome and performance? I want to explore sales commission plan effectiveness, but first, a slight diversion, that will make sense eventually. 

In the running community, there is an often-used phrase:  

The race isn’t won on the hills, but it can be lost on them.

Hills are really difficult to run up; some people may make it look easy, but it isn’t.  However, you are unlikely to overextend yourself running up a hill.  However, when you run down a hill, the stronger your legs and mindset are, the less you are likely to brake.  When you brake when running downhill, there are 3 negative impacts.  The first is that other runners may be braking less and therefore will be moving faster than you. The second is psychological, as you will feel disheartened as others run past you, and the other runners will be buoyed as they pass you. The last is mechanical, as you brake, you are causing damage to the muscles in your legs, predominantly your quads, and that will reduce your speed once you finish on the hill.  So running a great hill may keep you in contention but is unlikely to win you the race, but get it wrong on the hill and your chances of winning are shot.

So what has any of that got to do with commission plans?  Well, the same principle applies to commission and goal setting: A perfect commission plan will not double your output and revenue; however, a poorly constructed commission plan can absolutely destroy your chance of success.  

Considerations for a commission plan

So what are the components that make a commission plan fit for purpose?  That will largely depend on your circumstances and the objectives, but here are a few things to consider.

Balance financial and objective needs

Commission Plans need to be modelled for financial purposes, and most companies do this, but they should also be modelled on the objectives too.   I once worked with a sales organisation that sold subscriptions and had incredibly high renewal rates.  In their industry, a rate of 90% was the benchmark, and they were running at 92% for revenue and 96% for client count.  They made some changes to the commission plan though, as they felt it was paying too much for renewals.  Renewal rates plummeted, both dropping to under 83% the following year, and there were no increases in any other part of their business. The amount they saved in commission payments was chicken feed compared to what they lost in committed revenue.

Reward don’t punish

 Commission plans and goals need to inspire people to exceed, rather than scare them to not fail.  I once had a conversation with a new business sales rep that went something like this:

Me:  I have noticed that you seem to hit your goal every single month without fail but never exceed it. 

Him: Yes, as soon as I get to my monthly number, I push any more sales into the next month.

Me: Why, that limits your success.

Him: No, it doesn’t; it makes sure I am always at goal.

Me: But that means every year you will only ever hit 100%, you will never exceed it.

Him: Yep, it’s great, isn’t it?

The conversation went on like this for a bit longer, but it was obvious we were looking at the situation from completely different angles.  

I wondered how far beyond his goal he could achieve, and he just didn’t want to fail.   

His thinking was in part down to his personality but was also an unexpected consequence of the way the goals were set.

Keep it simple

The plan and goals need to be simple and unequivocal.  I have seen commission plans that were functioning well, and one in particular that offered increased rates when a salesperson hit their annual goal.  Watching that team towards the end of the year push to get across the finish line was really inspiring.  Management decided to change the plan though, without a clear rationale, and the revised plan meant part of the commission was held in escrow whenever a sale was made, and the escrow was only paid out when the sales person hit their annual goal.  The move from carrot to stick immediately demotivated the sales team, creating an environment of fear of missing rather than excelling. The subsequent years saw the sales team perform significantly lower than before the change was made.  In addition the sales people simply didn’t know how much each sale was worth to them, and they got used to the lower rate throughout the year.  They had already written off the escrow amount and saw it as an unexpected bonus if they achieved it rather than something to strive for.  Not the outcome that management had hoped for.

Many companies have commission plans in place that are tweaked each year, usually around now when they are planning for the coming year.  If that is you, I would urge you to take a step back, think about the following before you get into the mechanics:

• What behaviours do you expect from your salespeople?
• What results do you want from your salespeople?
• Does the commission plan support those or work against those?
• Do you consider the goals to be the perfect scenario or the bare minimum?

Only when you can answer yes to these questions should you think about financially modelling the plan & goals.  

It is rare that commission plans get changed throughout the year; what you do now could influence how successful your sales people will be in 2025.

Ray

The Sales Doctor

Consult | Assess | Recommend | Execute

Post by Ray King, 31st October 2024