Commission Plans That Do What They Are Meant To: Drive Execution
Commissions are a very subjective business, and for most sales people, a very personal business, and rightfully so. Sales is one of the last professions where your returns is frankly dependent on your abilities and the execution of those skills. In most cases, except in organizations where the sales force is unionized. (Talk about an oxymoron, have you ever seen two words that do not belong in the same sentence, union and sales.)
The one business that all seems to agree on is that the incentive plot should drive results. Of course, that assumes that you have the right plot in house. After that, you get small agreement.
There are the purists who say that incentives should only be paid for results; deal is closed, invoice issued, revenue realized, the rep is paid. While its simplicity makes it hard to argue with, it also leaves it much less effective than it should be, even in positions where there is no base, it is 100% commission.
If in fact incentives are supposed to drive behaviour, and let’s for the remainder of this post agree that behaviour equals endeavor, (the right endeavor), then why do most people only incent results? Is it not the activities that ultimately lead to results, results, the close, is the end of the process, I guess that’s why they call it “closed”. Why not then incent the right activities, the right behaviour that leads to the results.
Paying only for results seems to have an element of gambling to it. At the risk of over dramatizing it, you roll the dice and hope the right numbers come up. Sort of like taking a rep, giving him a territory, pump him, train him, and then send them out, and hopefully they come back with the right number. And hey if it is a smaller number, it is a smaller payout. But the savings on that incentive will never equal the lost opportunities.
One of the reasons to have a properly documented sales process is so that you sales organization can do the sale in a logical and sequential way. So then why not incent along the same line. So as an example let’s say a rep can potentially earn 10% on a agreed deal; assume the average deal is $100,000, $10,000 commission up for grabs. Assume you have a five step process, and you know that based on past history, if specific activities are properly executed, the probability of closing the deal successful in a proper time frame goes up exponentially. Would it not make more sense to incent the behaviours and activities that ensure that those steps are consistently executed?
Appointments are key, so you may pay 10% or $1,000 for qualified initial appointments, you would have to have qualified defined. You know that if you can get people at a high sufficient level in the hierarchy to tour you facility, you stats show that you probability of closing those that tour is over 60%. Why not pay another 10% for carrying out that. Same stats show that (real) proposals have a closing rate of 70% or greater, so you pay 10% for real proposals. This still leaves 70% for the close, but you have frankly impacted behaviour by incenting it, which is the premise after all?
There are a number of issues that need to be considered, I do know the view that the base salary is meant to pay for those activities, and the commission is reward for success. I would not argue with that, as a concept it is valid and excellent, in reality it seems to lead to a vast majority of B2B reps not hitting their financial targets. Some will tell you that this is where management by objective or some KPI scheme will help, again in concept fantastic, let’s examine reality once more. Under the conventional schemes you often find reps who will close a couple of large deals a year, get their commission, and the company still doesn’t get what it wants.
So while the details do need to be worked out, seems to me a much better way to impact and alter behaviour and drive execution in a way that is financially rewarding and honest for all.