Five common mistakes to avoid when creating a compensation model for your sales team

After building and managing sales teams for a couple of years now and having access to dozens of sales organizations in different companies, I decided to share some of the most common mistakes that are being made when it comes to setting up a commission model.  

Why is it important? Because I’ve had the chance to see the sales performance double by just changing the commission model. Therefore, a well-designed and well implemented commission model is crucial for a stellar sales performance.

1. Capping the amount of commission, a sales agent can earn

The logic behind capping a sales agent's commission is simple and tempting. It allows you to control the salaries more easily and you always know the maximum total salary that you might have to pay in a given month.  

To my experience it's one of the biggest mistakes that you can make. In a sales-driven company the output of your sales team is directly linked to your top line revenue. When you're trying to grow a company, you should especially make it as rewarding as possible for the sales agent to fight for every extra euro.

It is not uncommon that a month's best performer is responsible for 70% or sometimes even more of the total revenue. Why would you want him to be less motivated at some point during the month by not rewarding him for the extra revenue after reaching the cap? When you focus on growth and revenue it makes no sense at all.

Your top performing agents should earn as much as they can because your revenue depends on their motivation and performance, more than you may think. And whether you believe it or not, commission is one of the top drivers of a sales agent’s performance.  

2. Setting the wrong targets

Setting targets right can be very difficult but really important since they have a direct impact on your sales team's output.

On one hand it is a proven principle that higher targets lead to higher performance. And sales is no exception to that. On the other hand, if targets are being set too high and they are unreachable it is unmotivating for the whole team. And what makes it more difficult is, you won’t be able to change the targets too often, especially when targets are tied to compensation. An increased target can feel like a loss for the sales agent because it seems harder for them to make the same amount of money.

So how do you set your targets right? The approach that has led to the best results so far is to focus on data as much as possible. The average monthly revenue per sales agents in the last six months is a good approximation for a realistic target. Since you want to increase the overall performance it makes sense to set the target 15%-20% above this average. By repeating this exercise every 6-8 month you can increase the sales performance just by setting smart targets.

 3. Delayed gratification

Another common mistake is to focus too much on the company’s cashflow when designing the commission model. This usually leads to the rule that the commission is being paid after the company has received the money from the customer. This can result in a time gap between closing a customer and the sales agent receiving the commission.  

Why is it bad? Of course, cash flow is important, but this is definitely the worst way to optimize it. Our brain looks for instant gratification. 100€ today is better than 100€ tomorrow. When delaying the payment of a commission you automatically delay the corresponding gratification for the sales agent. This has a proven negative impact on the motivation.

The model that has been working the best for us is paying the commission the month after a deal has been closed no matter when we'll receive the payment from the client.  

It has two main benefits: 

• The time between close and commission is short, therefore people are motivated.
• The sales agents know what they are going to be paid, which leads to a lower personal stress level.

If you have problems with cancellations or receiving payments, you can still take it into consideration by adjusting the commission itself (e.g. 10% instead of 11%). But never delay the gratification!

4. Making the commission depending on factors that can’t be influenced by the sales agent directly

This mistake is similar to the one above but focuses on a different aspect.

In order to incentivize sales agents to close the "right" customers, it is a common mistake to only pay commission after a customer has been taken live successfully. Thus, the risk of closing wrong customers that might churn during the onboarding process should be minimized.

The problem that comes with this logic is that it also leads to a delayed gratification as well as potentially punishes a sales agent for mistakes that wasn’t theirs. For example, if a customer churns due to a bad onboarding experience.

The solution is the same as above: Pay commission as quickly as possible after a close has happened and don't let it be influenced by other factors, such as onboarding experience.

According to my experience closing the wrong customers can also be avoided by good training and a constant feedback loop between sales and operations. And in case a sales agent closes a customer that obviously doesn't fit to your product you can still cancel the commission.

5. Making the commission model too complicated

There is one important rule when it comes to commission models that should never be neglected: Make it as simple as possible. It should be so easy that it fits on one slide and you can explain it to a new sales agent in 5 minutes.  

Sales agents must be able to calculate the expected commission without a complicated excel sheet. They should be able to know in every given moment how much commission they are going to receive and how much the next close is going to bring them in additional commission.  

Having a too complicated commission model that is based on too many data points is confusing and can have a bad impact on the agent's motivation and performance.

Conclusion

By avoiding these five common mistakes you can create and implement a commission model that can bring your sales organization to the next level. When designed correctly the commission model is a powerful tool that can have a direct positive impact on your revenue.