I have seen many entrepreneurs struggle with their company's sales commission model. A commission model has to create balance between maintaining profitability for the company while creating incentive for the sales team--an incentive for the team not just to sell more, but to sell the way you want them to and for them to behave the way you want them to.


For example, the commission model has to incent the sales team to make sales without burning up the market, without damaging the company reputation, without burning bridges without setting customer expectation so incorrectly that the customers do not buy again in the future and, all the while, maintaining good records and information collection. In summary, the incentive component of the commission model has to balance sales team motivation and reward, as well as, the long term objectives of the company all the while being sufficiently profitable for the company (we mustn't forget this!).


The problems I have seen in sales commission plans fall into two categories: sales incentive problems, sales profitability problems and simplicity problems.


Here are some examples of incentive problems:

  • Commissions paid upon and based on signed contract rather than a delivery. This doesn’t consider bad deals that get signed that are un-implementable or promises made to customers in the sale process that can't be fulfilled that require later contract cancellation or modification. This creates that unpleasant situation where commissions need to be recovered or adjusted from the salespeople. This also takes the pressure off the sales team to get a project or sale implemented and shipped. The salesperson is paid and has a lot less interest in implementation and customer satisfaction.


  • Commissions paid at the very end of a long implementation cycle. In this second and, in many ways, opposite problem, the sales team doesn't have a direct tie between making a sale and their financial reward and thus loses motivation. Sales people need to be able to DO something to affect their income. The need to be able to come in to work and say, "I need to pay for my kid's summer camp, I better get on the phone" and then be able to feel some results.


  • Commissions paid generously on long term residual business. This causes your most productive sales people to turn from great hunters to farmers as they get tied up with account maintenance tasks and no longer have the time or the financial incentive to pursue new accounts.


  • Commissions don't actively promote "good behavior" on the part of sales people. Full commissions are paid on bad or simply unprofitable deals, unprofitable customers, less profitable products and implementations. In this scenario, there is no incentive for good team citizenship activities like maintaining a properly updated CRM, client notes or proposal archive.


Some examples of the profitability problem:

  • Too much money is being paid out in commission or there simply isn't enough profit in the average transaction to offer sufficient commissions. It is too often the case that the company's business model and sales process is set up such that there simply isn't enough commission dollars available to properly incent and reward the sales team or there isn't enough profit margin to sustain the company after paying commissions. The company's products or services simply can't be sold profitably in the current manner. Solving this problem isn't a matter of finding some superstar sales person, it is about fundamentally re-engineering your sales process and possibly your business model.


  • The lifetime value of the customer is not being considered in calculating commission or marketing investment. I have seen many business leaders recoil from the idea of making significant investments in either sales commissions or marketing to get a new account or even a strategic account even when the long term return on investment is extremely favorable. The irony is that most business leaders would borrow against their 401k, or their house, to make an investment with the same ROI if it were presented by their stock broker.


  • Sales goals are set too low with corresponding commission rates too high to both keep the sales team properly motivated and to maximize profit. There is a fantasy that many entrepreneurs have that their sales people want to make more and more money. The reality is that this is the exception, not the rule. Over and over I have seen salespeople shift into lazy mode once they have made their personal target income and/or their "keep management off my back" target.


Simplicity Problems:

  • Commission plans are too complicated and conflicting for sales reps to keep track of how much money a deal represents.


There is no fast and easy solution to any of these problems. The incentive problems need solutions that focus on finding that optimal balance between proper incentive and company profitability. While the profitability problem is one of bad business reasoning, or that the overall sales process is not supporting sustainable company profit.


In my experience, it is virtually impossible to create a sales commission plan that optimizes all these characteristics simultaneously particularly because there is an additional requirement--that a commission plan be reasonably simple and straightforward so that the sales team can understand it! If we make a sales plan that has bits and pieces to address all sorts of individual goals, it becomes analogous to the US tax code with loopholes, penalties, credits and deductions. It is best to keep the plan addressing the key aspect of profitability, but focusing on clear and simple incentives.