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How to Devise commission schemes that work. Discover the potential pitfalls when putting together a sales bonus or commission scheme. Evaluate the most common types of commission schemes used by UK businesses - will they work in your team. Hints, tips and advice on creating a sales commission scheme

Commission Schemes - Ideas on various commission schemes and sales incentive schemes by Rob Scott, Managing Director, Aaron Wallis

So is it really all about the money?!! Undoubtedly good sales professionals are looking at incentive and commission schemes to drive them onto higher sales performance. Sales commission schemes, bonus schemes or annual bonus is the norm as part of a sales benefits package yet there is little information available to help companies that are looking to redesign or introduce new schemes. In this article we detail various ways to devise commission schemes that work but also look at other was to recognise and reward top performance. We hope that it has a few ideas in it that could be right for your business.

Why Doesn't One Scheme 'Fit All'

It is very difficult to generalise or to propose a panacea commission scheme, as what works for one company may not work for another. However within this article we offer a handful ideas for you to construct the best sales incentive scheme for your team and business.

The right method is entirely based on your company culture and the type of way you secure sales, the 'toughness of the sale' involved, the level of the employee's input required to secure sales. It also has to be based upon the size of orders won, the GP within these deals, the amount of competition and many other contributing factors. However it must be remembered that commission schemes need to be kept simple so that it achieves the objective of driving sales staff to greater sales performance.

Within reason, it is common to pay a lower basic salary (than employees at a similar level within your business) and higher bonuses or commission that will often take the overall package to be higher than other members of staff. With increased risk, daily rejection and other obstacles in their path it is quite right that top sales professionals should earn more than staff in other departments. If you don't recognise, incentivise and reward your top sales performers you will undoubtedly lose them.

The Goal in Devising a Commission Scheme that Works

For the employee the scheme has to be clear and motivational to serve the purpose of driving them on to bigger and greater revenue numbers.

From an employer's perspective it has to sensible (i.e. not paying bonus on bad business) AND be easy to calculate.

Monthly or Annually?

An idealistic commission scheme for sales employees would be both monthly and annually - perhaps an annual override for exceptional performance (as each payment term motivates different behaviours).

Paying sales employees monthly commission incentivises immediate action. Because the selling environment for many companies can vary seasonally, implementing a monthly commission programme offers management the ability to rapidly react to changing market needs and trends.

Annual commission drives consistent top performance particularly if it an accelerated scheme based upon achieving more than is expected of the sales professional. If an annual commission scheme is implemented, it could also be based on total company performance so staff can promote each other's behaviour and be held accountable for helping to achieve the company's principle objectives.

Play Fair

If multiple salespeople do the same job, their commission compensation schemes should be equal. Mr. Williams would not be pleased if he knew that his colleague Mrs. Avery was receiving a better compensation scheme. This could provide friction within a team and could consequently leave to higher levels of staff turnover. However, you might want to reward salespeople through higher base salaries for length of service, experience or exceptional performance. But, most importantly, be very, very, very clear with all of your sales staff and apply any differences consistently.

When you choose a pay system for your business and sales employees that pays by results, you will need to consider whether to top up workers' earnings with payments such as commission, bonuses, tips and gratuities.

The Most Common Commission Schemes

Here are four common commission scheme strategies:

1. Based on % of Turnover

Commonly adopted as it is easy to calculate for both employer and employee. However it can be potentially corporate suicidal as it means that the sales person can win unprofitable business but still earn decent commission! If adopted it should be based on achieving a minimum level of gross profit within the deal (or in an environment where your sales team are unable to negotiate in any way so that the GP level is maintained)

2. % of GP

Probably the most common commission scheme of all as the employer remains in control of the bonus pot and sensibly is only paying out bonus on definite contribution to the company coffers. However it can often be difficult for the employee to work out how much that £100K deal that they've just won is worth to their back pocket. Therefore it sometimes doesn't act as a motivator to take yourself 'out of your comfort zone' and to close that little bit harder to secure the deal.

3. % of GP and other factors such as meeting customer satisfaction, key performance indicators

In my years I have seen some unbelievable commission schemes based on points systems, meeting milestones as well as fiscal targets, meeting KPIs as a percentage of the commission scheme and so on and so forth. These schemes are normally introduced with every good intention to ensure that the sales professional doesn't win bad business or only sells products that the client actually wants. However, they are often ill thought through with the consequence that they are messy to calculate and are so complicated that the sales professional doesn't know if they're due 1p or £10K and it therefore doesn't act as a motivator.

A good scheme that does work taking in other factors would be commission paid out based upon the scores from a customer satisfaction surveys. For instance overall if the customer feels the service received was between 5 and 7 out of 10 then commission is paid at the standard rate. If it is below 4 then commission is paid at a lesser rate (or not at all) and if it is over 8 an additional accelerator or bonus is paid. In this way the scheme is motivational to the sales professional AND ensures that customers are satisfied. This type of scheme can be put to powerful use by Sales Directors looking to change their sales culture or approach to business.

4. % of GP above a threshold

I personally think this type of scheme is the best as it is both the fairest to the employer (i.e. a sales professional doesn't earn a bonus until they've covered their costs) and yet it is still easy for the sales person to know how much the 'deal' is going to be worth in their 'back pocket'. It therefore meets its purpose as a 'motivator' and is easy to calculate for all parties.

The Golden Rule

When introducing any new bonus or commission scheme it is imperative that you insert the following, or similar, line into the commission scheme and the employee contract:

"The Company reserves the right at any time, in its absolute discretion, to vary the amount of commission payable and/or to vary the terms of the commission arrangements and/or to withdraw the commission arrangements in their entirety on giving you (number) weeks/months' notice".

I have known several companies get into very difficult situations but not having this clause, which is pretty standard in any sales contract.

It's Not All About Money

It is extremely important to retain your best sales talent. There is no denying that financial rewards aren't important for most sales professionals however it is not the only thing that is going to motivate your sales team. If commercial realities and sales are down then financial rewards are likely to be also, therefore, it's time for you to get more creative. There are tonnes of thinks that you can do for little or no money. Things like a personalised letter sent to your employee's home address or a well chosen book with a personal inscription congratulating them on their recent 'big win' can very powerful. <Link to Reward Article - http://aaron-wallis-sales-recruitment.blogspot.com/2010/07/rewarding-your-top-sales-people-ten.html >

Every Little Helps

Remember your work colleagues have a life outside of work too. They might enjoy spending their time watching a game of football, catching the latest Tim Burton master piece or just treating themselves and their family to a good meal. If you know what your employees like to get up to in their spare time you will be able create and provide smaller rewards that may not have a high financial value but show that you truly appreciate them. Providing these rewards helps increase motivation, team morale and ultimately productivity and sales.

When The Going Gets Tough

It's a pleasure to focus on the numbers, numbers and more numbers when things are going well. Though when times are tough it is important to pay attention to individual performance and the specific KPI's to understand where things could be done better along the chain of the sales process to help improve and hone your sales team's skills.

You can then incentivise your team members to each design a training course on the element of the sales process that you want to improve and reward accordingly based upon the positive impact that this training delivers (either as individuals or as a team). If a sales professional is struggling on a particular aspect of the sales process then get them to design a training course for your team on this specific area. At a subconscious level this will significantly help them to improve their skills in this area and ultimately increase motivation - and output.

Tell The World... Or Just The Team Will Do

Many employees may feel that their hard work and hard earned cash for the company goes unmissed by their managers and by other work colleagues. In a number of surveys (including the State of Sales in the UK) recognition and respect for the job they do is cited as the most important thing that sales professionals seek. Sales people love public recognition and would thoroughly enjoy having a lunch in their honour, a poster in the employee newsletter or even just a thank you by the sales manager during a team meeting. Little cost but maximum impact!

To Conclude

Any sales employer, at one point or another we will come face-to-face with difficult times or difficult morale or staffing issues. It is therefore imperative to focus on the right things, the correct incentives so you can get the best out of your staff.

Commission schemes are important, but there isn't one scheme that should be used over another. It can hugely depend on the nature of your business and the industry you work within. However, never underestimate the power of simpler methods of gratitude for hard work such as a personally handwritten thank you notes, a bottle of Merlot or an all expenses paid dinner for your employee and their family.

For Further Reading see the following article from our Employer’s Advice Library on Performance Related Pay - Creating a Link Between Pay and an Employee’s Performance