9 Tips for Paying Better Sales Commissions

Paying commission wisely is a big challenge for business owners and managers. Commission can either drive sales performance, or turn your sales team into a bowl of oatmeal. Designing a commission plan that drives sales performance isn’t as easy as it sounds. There’s a minefield there, and you have to navigate through it successfully to have a commission plan that works.

Here are nine thoughts about commission plans and compensation:

1. I hate the word “target.” I don’t like the word “plan” when used as a substitute for a job requirement. I even shy away from the word “goal.” These words sound too tentative. I had a target age of retirement at age 40. I planned to have $10,000,000 in the bank before I retired. I had a goal of buying a 10,000 square foot house. Yet, none of those things happened. So much for targets, plans, and goals. Did I mention I want to lose fifty pounds?

Why don’t you simply just say what you mean. How about “minimum acceptable revenue produced,” as in, “Derek, your MARP for 2010 is $1.2 million. Got it?”

2. Most commission plans are based upon a percent of something. But if the something is gray or unclear or inconsistent, the percentage amount will be gray or unclear or inconsistent. How can employees be clear and consistent in revenue production if you’re not clear and consistent in how they’re being paid? Clarity is king.

3. Don’t roll out a new compensation plan only to change it one month later because you had to rethink a bunch of stuff. Do your homework. Accurately predict your losses and other challenges that will arise with the new compensation plan. Plan ahead. Then implement it. No going back, no waffling, no negotiating – it is the new commission structure. If you must, review the plan annually and make whatever small tweaks are required.

4. Compensation plans should do the best job of compensating your best performers. It’s okay if your bottom 10% of sales performers quit every year because they’re not making enough money working within your commission plan. Hire a new group who won’t be in the bottom 10% the next year. Don’t worry about low performers. Do you really want them? Do you really need them? Make sure your structure compensates high performers.

5. No compensation plan will make every employee happy. Some won’t even make any employee happy. Do what you need to do to run your business. Compensation should drive performance. If it does that, you’re a winner.

6. Whenever an employee complains about your compensation plan and has a suggestion for you (“How about if we pay 12% instead of 10 %”), ask “What are you willing to give up to earn 12%?” They won’t have an answer. End of discussion.

7. Pay “super commission.” If your commission rate is, say, 8%, consider paying 9% once the salesperson meets their monthly sales requirement (or some other landmark), and only 7% commission when they don’t. That’s super commission, and better than paying everybody 8%.

8. Pay super-dooper commission. Add a bonus for making 10% over minimum expectations for annual sales production. That’s super-dooper. Use what you’re saving paying the low performers in #7 to pay your high performers (refer to #4).

9. It’s okay if salespeople make a lot of money…if they earn it. I’m amazed at the number of small and medium-sized businesses that believe, either consciously or unconsciously, that there should be a cap in salespersons’ commission earnings.

Sometimes it takes this form: New compensation plan is implemented > it works like it’s supposed to > the best sales reps make a lot of money > management thinks they made too much so lower how much reps can make the next year> high performers quit performing or leave the company. Let your plan work. It’s okay if salespeople make lots of money. Part of that money goes to you. What you want is lots of salespeople who make lots of money. That’s how you can make even more money.

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