Commission schemes. Do you have one? Does it work – i.e. does it drive the team behaviours you want? And do you need a PhD in pure Maths to understand it?
This is a topic that was discussed very recently with our current BAPs cohort, so here are 4 quick headlines to think about if you are reviewing your team’s commission schemes:
1. Should you pay commission on Turnover or Profit?
The general rule of any incentive scheme is to reward behaviour your salesperson has influence over. So, if they have no flexibility over pricing or supply costs, then it’s only fair to set their commission against revenue. If however, they have autonomy over margin then you may consider Gross Profit as the metric.
2. Do you need to introduce a threshold?
A threshold is a number that needs to be reached before a commission is applied. So why would you need one? We strongly recommend that if you pay commission on Turnover then you must calculate a minimum threshold which repeats when your salesperson has covered their own cost. (Margins and cost of sales will differ according to the sector, but a good starting point would be 3 times their basic salary as their threshold).
If you pay commission on margin, you may build in your cost of sales as part of your margin calculation and therefore may decide a threshold is not needed.
3. Should you pay commission monthly or over a period?
The timing of a commission and threshold may also be a consideration, particularly if you have a long lead-time or a very seasonal product.
Consider the example below based on a 10% commission on all monthly sales.
Jan Feb Mar
Sales target £20,000 £20,000 £20,000
Sales achieved £40,000 £0 £0
Commission paid £4,000 £0 £0
Do you see the problem?
In this example, this salesperson has earned a commission in January even though they delivered no revenue in February or March.
An alternative way of structuring this example could be to introduce a minimum quarterly threshold of 60K (or basically their sales target) and consider paying a higher commission % for all sales above that level.
Do you also take into account any returns in the period? Salespeople will find every loophole to increase their earnings and I know of salespeople who would put through fictitious orders to their ‘friendly’ clients on the last day of the month, so they could hit their number, even though they knew the goods would be returned the following week!
4. Should you reward the Team vs. the Individual?
There is no right or wrong answer here. Salespeople, particularly direct sales should have no restrictions on earning potential, but no salesperson works in isolation and it is possible to reward both.
A blanket team reward, that shares a combined success, for example, I know of a business that pays out 5% Net Profit equally amongst all its staff at the end of the year. It acts as a great motivator and team leveller. A £200 cheque carries much more meaning to the junior members of the team, but it allows everyone to benefit from the company’s success without hierarchy.
Ultimately what you focus your people on, is what they will deliver – so ensure your incentive scheme is set-up to deliver the activities and motivate your team players to make the daily choices that increase performance and drive profit.