Sales Commission Plans – It Doesn’t End with the Percentage

July 1, 2008 – 11:52 pm by RM Crill

We’ve dealt with many commission plans. Some we inherited, some we wrote. And we’ve faced the unpleasant task of disputes related to them. First-time drafters of commission plans don’t realize that a plan only starts with the commission percentage – there’s much more.

Commissionable Sales – It may be obvious, but we need to state what products or services are commissionable. In early stages you probably intend to have your one or two salespeople get a commission on whatever they sell. While stating the product or service in the plan might seem unnecessary, think about the potential of some new product or service or signing a distributor. Maybe the same commission rates should apply but maybe not – best to state what you want the person to sell and leave anything new to be discussed.

Commissionable Amount – The plan has to state if you’re calculating commissions on gross revenue or revenue net of deductions. In some cases, you may have high shipping or license fees that need to be deducted before the calculation of commissions.

Territory – Territory can be defined as a geography or a market. If using geographic areas, we usually state that the office of the decision maker represents the location. In some cases, one company might have multiple possible locations (say you’re selling recycling services to Walmart and the store manager makes those decisions) or they might have one (if you signed a deal to distribute your product in all Walmart stores). A market territory is usually a vertical market like “local governments” or “home builders”.

House accounts, exempted accounts – Are you actively pursuing accounts that need to be exempted because they’re going to be “house accounts” (nobody gets commission – maybe the CEO is handling) or because they’re near closing? Upsales – The commission rate for sales of a new product to an existing customer are often a bit lower than that for sales of a new product to a new customer. If you have customer support, will you ask them to upsale? If so, will they get a commission? A good friend told me that commissioning CSRs on upsales drives a wedge between them and Sales unless there’s a commission split. I lack direct experience but that sure made sense to me.

Renewals – Like Upsales, renewals are easier than initial sales and usually carry a lower commission rate. The plan also has to state for how many years a commission will be paid on a customer’s renewals; usually the rate declines over time. We often limit these to two or three years but some companies (where renewals require substantial effort) need to pay commissions on every renewal.

Override – If you hire a sales leader, he’ll have his own deals and he’ll be managing a team. It’s customary to compensate a sales leader with an override commission on the team. This override commission is usually about 1/10th to ¼ of his normal commission rate. And don’t forget to do the math on total commissions you’ll be paying on each deal. Duration – The effective period of any plan should be directly proportional to the amount of time the company has been selling. startups producing their first commission plan should enact plans with periods of a quarter or two because the chance of such plans achieving target total compensation is slim. Short periods just mean there’s an anticipated review of the plan.

Multiple Recipients – Commissions are determined individually and not based on the combined sales efforts of other salespeople. Where the company has authorized more than one salesperson to be involved in the sales activity, and a sale results, the company will determine the allocation of commission earned between or among the salespeople and the total commission paid won’t exceed the commission otherwise paid to the person with the highest commission rate.

Confidentiality – The plan should stipulate that the contents of each person’s plan are confidential and not to be shared within or outside of the company.

Channel Sales – The plan should carve out any channel sales opportunities and either assign those as house accounts, to someone with that specific responsibility, or at least use a different (smaller) commission percentage.

No Representations – Be sure to remind the sales team that you’re not making representations, promises or predictions regarding: (a) the amount of any net sales proceeds or the ability or likelihood of the Salesperson to earn any commission; or (b) the assignment, allocation or continuation of any accounts, clients, customers, territories or regions.

Prior Plans – Be sure to note that any prior plans are no longer in effect.

Timing of Payments – As a CFO I like quarterly payments as they reduce the processing cost but whether monthly or quarterly, they should be based on customer receipts, not “sales”, especially when cash flow is a critical measure.

Pricing – To be commissionable, sales must adhere to the established price list(s), unless given specific authority by someone of authority.

Returns – In the event that a customer is refunded in part or in full, the company will recover the appropriate amount of commission paid from the salesperson.

Active Status – We usually state that the salesman has to be an active employee on the date his commission payment would be paid in order to be eligible.

Draws – I just hate draws. They’re a payment without a link to activity at a time (when the sales person is getting started) when activity should be highest and results (momentum) matter most.

Pipeline Payments – You should expect something a little out of the ordinary from Atlas and here’s our offering to sales comp plans: the death of draws! Bring on the Pipeline Bonus! When your salesperson is getting started, the expectation is a growing pipeline. So, rather than write a check not dependent on results – pay for performance; pay for building this pipeline. Is it exact? No. Is it easy to defraud the company? Yes. But is it much better than a draw? Oh yeah.

The idea is simple. Standardize stages to classify deals. Here’s an example:

  • 10% – Prospect Stage – transferred to regional manager and contacted; some interest.
  • 40% – asked for a proposal and have expressed buying interest.
  • 60% – proposal is in engagement and negotiations are being discussed.
  • 80% – Yes to Terms – champion or decision maker has agreed to terms and to buying.

The salesperson builds a list of potential customers in the pipeline report (this usually includes prospect name, contact person, potential revenue, next steps and other items that are company or product-specific).

The probability weighted revenue of all deals in the pipeline yields the value of the pipeline and we measure that against goals that are set with mutual agreement between the salesperson and management. We use this pipeline payment during the period we expect no actual sales due to the duration of the sales cycle or while waiting for product completion or general assimilation.

We usually give salespeople the opportunity to earn a little more than the draw we would have paid if the greatly exceed expectations on the pipeline.

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