Commission Structures

Don’t we wish that performance was as easy to measure in all positions as it is in the sales function! Because sales does lend itself to measurement, we leap toward that comfortable spot, relieved that our management load has been lessened.

But just because it is measurable doesn’t necessarily mean that we should view it primarily in that fashion. In fact, experienced managers sometimes get this nagging feeling that they are missing something by implementing commissioned sales in a service business.

It’s here to stay, though, and in fact brings some advantages with it. Just recognize that successful selling is more about the person and the positioning than about the plan. When we emphasize the compensation plan we are likely avoiding some management responsibility. Good commission plans do not provide self-management for the sales people. Instead, they provide an appropriate incentive for a situation that would likely succeed anyway, almost regardless of the plan.

As you design your plan, think about the eight options. On this continuum, the first provides the least risk to you and the last provides the least risk to the employee:

• Full commission.
• Full commission with draw.
• Full commission with expectations plus commission.
• Base with expectations plus commission.
• Base with expectations plus commission with draw.
• Base plus commission.
• Base plus commission with draw.
• Salary.

This suggests that success hinges largely on the right person. Unless you have that element in place, no plan is going to fix it. A great compensation system will not work without a great sales person. In fact, it will harm you, delaying an inevitable personnel decision and putting success just that much further out of reach. If you think you might be in this situation, make a note to yourself that tampering with an existing plan is often an attempt to continue denying that the person filling this job isn’t the best fit.

The best solution? Start with a base, to which you attach certain expectations (e.g., list maintenance and even a certain level of new business closings). Add a full commission for any sales on top of that expectation, or add a reduced commission (smaller percentage) if you want to reward the sales person for every dollar brought in. And if they need a jump start, give them a draw but cap it at a few month’s worth of base.

In general, shoot for 80% of a sales person’s compensation to be comprised of base, and then make whatever management decision you need to about their performance instead of relying on a spreadsheet.