8 Tips on Commission Plans

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A friend reached out this week to ask if I could recommend any articles on setting up commission plans. Her company was moving in that direction, and she wanted to educate herself on the respective nuances.

Creating a commission and/or bonus structure seems like it ought to be the simplest thing in the world to do, but it is, in both my decades of practical experience, and in the literature on the topic, anything but simple. ?

There are, however, certain themes, principles, and truths that ought to be considered before constructing a commission plan. It may not make the process of setting one up any easier, but you’ll be better prepared for the mayhem.

?1.???? Don't expect ANY comp plan to fix under-performance - it never does. You can throw all the money in the world at a sales problem, but there’s precious little evidence to support the idea that doing so will fix poor hiring, lack of training and development, an irrelevant brand, or consistently poor customer service.

?2.???? Transparency and fairness matter a ton. ?Studies have shown that people would rather make less money, than make more if they believed others were being compensated (unfairly) more generously than them. If the comp plan lacks transparency, the salesperson default mode is often that they’re being screwed.

?3.???? The closer you can align the payment to the triggering performance metric the better. Our brain releases a rush of dopamine when we anticipate a reward is close at hand. That becomes muted when the payout is deferred to some far-off date. The longer you wait to make the payments, the less effective the incentive will be.

?4.???? Smaller more frequent pay outs are much better than larger one-off payments. People would rather receive four $5,000 commission checks than one $20,000 check. Touch your sales team with more frequent payouts.

?5.???? Any compensation plan should reward the BEST performers, not seek to level the playing field for all. Poorly constructed sales incentives, usually put together by well-intentioned HR folks, can serve to demotivate the top sellers. The only reason to have a commission or bonus plan is because you have determined that a meritocracy will drive more profitable business. Having made that decision, don’t undermine it by giving participation trophies to everyone.

?6.???? Pay for what you want to see happen and be mindful of unintended consequences. For instance, paying for top line sales, while allowing discounting, or encouraging low-margin sales, can reward the wrong behavior. Your plan should forward the best interests of the business and your customers. ?

?7.???? Avoid all or nothing plans. They can be a demotivator. There’s a reason some people refer to all or nothing commission plans as a cliff plan. You either get it, or you walk off a cliff with empty pockets. These kinds of plans can result in salespeople giving up when the ask is deemed to be out of sight, or patently unfair.

?8.???? A good compensation plan will never overcome the absence of recognition. Money is a scorecard. It matters to top performers. It should matter to top performers, but it does not serve as a replacement for ongoing recognition from a manager. Those two things are not mutually exclusive.

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As Abraham Maslow said, "Recognition is a need we all crave, and there are no exceptions."

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Thanks for reading,

Peter Smith

[email protected]

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