Here are ABHR Solutions’ 15 factors to be mindful of when developing a Commission scheme for Sales people.
- Do you base it on sales revenue or profit – no right or wrong answer and it will depend on a multiple number of factors for the business at the time. The “bean counters” will always say profit but it may make sense to do it on sales revenue if you want to accelerate growth.
- When do you trigger commission payments? Don’t pay it too soon and certainly not before the deal is in writing because the devil will be in the detail and Sales people aren’t always renowned for detail! Similarly, you don’t want to be paying it whilst the customer still has the option to back out. Specifically, be wary of commission where the customer has an early cancellation option.
- Staging payments – it may be appropriate to stage the payments and pay the commission in instalments but this won’t always be practicable in some B2B environments. Staging payments may help cash flow in SMEs but the Salesperson will be less keen. From a business perspective, it will assist with retention because a Salesperson will think twice about leaving if they are waving good bye to a chunk of commission.
- Don’t pay commission until the customer has paid up. Nightmare scenario – the customer doesn’t pay and you’ve paid the Salesperson 100% of the commission and the customer decides not to pay or withhold payment unreasonably and you now have a Credit Control function spending a disproportionate amount of time chasing payment.
- Who should be eligible? The old Teamwork argument – virtually everything we do in work involves teamwork and very often a sale cannot be attributed to one person. Eligibility needs to be very carefully considered because if not handled carefully, it can be highly demotivating. Do you include Sales Support Administrators?
- The Sales Director or Manager – is this person a participant in the scheme and do they have a vested interest. Are they on a different scheme or is their scheme based on the performance of their direct reports – just check there is no conflict of interest.
- Guaranteed commission arrangements…..think carefully and don’t be over generous for too long. Quite simply, why would you guarantee a Salesperson commission? If a new person is joining the business, they should be excited , fired up, ready to hit the ground running, share its vision and be confident about contributing to its success. They should be confident in their own ability and that they can hit their targets. If they need to ask you to guarantee commission, alarm bells should be ringing.
- Clawback – controversial but there should be a provision where you at least reserve the right to clawback commission. The Salesperson will always resist and argue but in an SME, a badly negotiated contract that fails to deliver the forecast margin can be damaging and ultimately affect job security. Also very divisive if the Salesperson is bragging about the commission whilst others had to clear up the mess.
- Sense check the scheme before launch. It seems obvious but take a couple of contracts or potential wins in the pipeline and run the numbers through the proposed commission model and check that the commission seems right taking all factors into consideration. It is always sensible for the scheme to be independently validated by a key internal stakeholder – often the FD.
- Ensure the rules of the commission scheme are documented because there will be disputes and arguments and it is always useful to have a “write up” of scheme rules. Makes dispute resolution a lot easier.
- In larger Companies, decide who has absolute authority to resolve disputes about commission payments. This won’t apply in smaller Companies because disputes will go straight to the owner, MD, CEO etc…
- What happens if a Salesperson leaves and is owed commission – always an interesting discussion?
- Regularly review the effectiveness of the scheme – if sales are not going in the right direction but the Sales team are earning good commission – stop and ask yourself some questions. You will also want to review the scheme to align it to strategy to ensure the focus is in the right areas.
- Sales people expect commission schemes whilst Operations and Managers expect bonus schemes – use the right language to describe your scheme because it is important.
- Confidentiality clause – make sure your Sales team have robust confidentiality clauses in their contract because you don’t want them soliciting your customers after they’ve eft and gone to a competitor.
If you want help with the development or introduction of a commission scheme, Adrian Berwick gives practical advice and support – either call 07885 714771 or email – adrian@abhrsolutions.co.uk
