For Sales Managers: Compensation Plan Best Practices

They say choice is good. Obviously, they have never put together a sales commission plan. Commission plans come in a million varieties – and each one’s a disaster waiting to happen. This week, Engage offers some tips for steering clear of commission calamities.

In one way, commission plans are the hammer of the sales manager’s motivational toolkit – almost every company uses them to build revenues and reward excellence. But unlike the implements that hang from the average handyman’s belt, commission plans come in millions of shapes and sizes. Instead of picking what you need from the shelf at Home Depot, you’re expected to work the millions of combinations and permutations into a commission plan of your own. Each is new, unique, and a disaster waiting to happen.

Countless commission structures fail despite the best intentions of business owners. Many plans are too complicated to be properly understood or effectively implemented. More fail when sales managers don’t explain their plans properly. The result: everyone comes up with their own interpretation of the rules, and forms a unique opinion of which customers and commissions they share. Before you know it, inside sales is battling with field sales, direct reps are at the throats of the channel team, and you’re caught in the middle of the fray. Selling time is wasted, morale plummets and salespeople start to resign. That’s no way to grow a company.

In 15 years of selling, I’ve never encountered a compensation plan that eliminated all conflicts. But with careful design and reinforcement of cooperative relationships, you can have a commission plan that works. Here are things to consider:

1. Keep your plan simple. The more complex the compensation plan, the easier it is to misunderstand or manipulate. For example, if your salespeople are assigned to geographic territories, be sure to develop and communicate clear guidelines on how they can sell to accounts that cut across territories, and how they’ll be rewarded for those sales.

2. Understand the plan and all its rules yourself. Review and edit the plan with your sales manager, and bring a non-sales manager into the discussion for a different point of view. Together, you should anticipate the questions your team will have and prepare solid answers. Remember: your salespeople will check whether their potential compensation might decline under the new plan. If that’s the case, be prepared to defend the changes.

3. Make sure everybody knows and understands the rules. Introduce the plan a couple of weeks before you plan to implement it, giving your team a few days to digest its contents. Then hold a group meeting to discuss it. Meet with each salesperson privately to reinforce the plan and address questions and concerns that weren’t raised before the group. Ask your people about the plan to check for understanding.

4. Encourage team building to ward off conflict before it starts. Have competing reps (for instance, inside and outside sales) meet to establish relationships and build trust. The most successful teams always engage with their selling partners.
Bring teams together to discuss potentially problematic accounts. I have seen some plans that actually required an agreement in writing of how customers can be approached, by whom, and how the commission will be split.

One more thing: your sales team will behave exactly according to how the plan best rewards them, concentrating their efforts on what pays the most. If you have a specific objective (e.g. new customers, more repeat sales, higher levels of customer service), then you must reward the behaviors that pursue those goals. Lucky for you, you have no choice.

Dedicated to increasing your sales,

Colleen