Commissions: A balancing act

We’ve all heard about commissions before, meaning, someone mentions the word and our brain quickly relates it to the motivation to sell the right product to the right customer; the simplest way to encourage a sales team. But once you start working in this business you get overwhelmed by its complexity. We ask a lot from commissions, and we want it to help us achieve a wide range of objectives from maximizing profits to finding new business. From that point of view we can begin to look at it differently with multiple components.

What we usually find is that management is pushing hard for increased revenue and trying to get profit, but usually commission structure isn’t that straightforward. We need to keep an eye and have a clear understanding of three important components in sales commissions: revenue, quotas and gross profit.

Revenue can be a little tricky. Sometimes the effort to boost high turnover through commissions could bring you unwanted business which can result in losing focus on “the right customer.” You might want to balance your revenue incentives against other elements such as gross profit or consider making it more appealing for business development personnel than account managers.

Quotas are commonly define as two kinds: floors and targets. Floors are the lowest expectation (percentages or aggregates) and usually when you pass “the floor” you will move to a new commission level. The target is the most common quota, often activated by revenue or profit. Again, you need to balance your quotas and be very clear about their purpose to make them work in your favor.

Gross profit or gross margin is the difference between revenue and the cost of making a product or providing a service. Gross margin varies from project to project, so you want to make sure that sales folks get the best they can. For gross margin, it means that commissions should be calculated on a project basis and ensured appropriate margin expectation.

As you can see, there are many factors to consider. Incentive Compensation Management and Sales Performance Management will play a huge role in your compensation success, but you have to keep in mind complex issues and variables such as commission or bonus plan frequency, company culture and especially effective cost tracking.

Nobody said it was easy, it just looked easy for a moment. But with the right tools, you really can become a balancing-act artist.

 

By: Roberto Madrigal