How Poorly Structured Commission Plans Can Limit Sales Performance

Organizations without an automated sales commission tool often face a variety of challenges throughout the sales cycle, which can include inaccurate payouts, shadow accounting, and lower sales volume. These challenges can lead to poor sales team morale, which further depresses sales performance. Keeping the sales team motivated and driven can mean all the difference between a nominal-growth or a rapid-growth business.

When organizations recognize the need for change, they often start by reviewing their incentive plan structure, as it plays a key role in driving the behavior of the sales team. Let's take a closer look at how structuring your commissions components as part of your incentive plan measures can deliver improved sales performance.

Effective commission plans lead to improved sales rep performance

Commissions are the most commonly used incentive measure and are paid out on individual sales. If structured strategically, commissions components can be an effective way to motivate sales teams.

Taking a closer look, commission plans can be structured in one of the following categories:

1. Straight/flat commission: Straight commissions provide a clear goal for selling. Each incremental revenue dollar translates to the proportionate commission. This structure provides enough incentive to sell without pursuing any aggressive targets. There may be a single rate for all sales or rates may differ for products based on their strategic positioning and/ or profit margin.

2. Tiered commission: Meeting and exceeding sales goals is key to a business’s overall growth. A tiered commission structure pushes sales teams toward specific thresholds in a clear and transparent manner. In a tiered commission plan, sales up to a certain threshold are paid on one rate. Once the threshold is crossed, a higher rate is applied. In more incentivized plans, the higher rate is applied retroactively to all past sales in the measurement period. The higher-stakes approach drives a stronger push towards targets.

If different products are paid out at different rates, tiers may be defined based on total sales or individual products. If all products are of equal strategic importance, tiers based on total sales encourage more balanced selling. Naturally, the needs of your organization will dictate which structure to follow when designing commission plans.

Well-designed bonus components drive better overall results

Bonus components are aligned more strongly with overall sales objectives and push towards aggregate targets rather than incentivize individual sales.

Bonus plan components are often structured as follows:

1. Tiered bonus: The most common bonus structure is a tiered bonus where different rates are paid on different levels of achievement. Like a tiered commission, this structure carries a higher reward for achieving targets.

There are two variations of tiered bonuses:

• All credits within a tier are paid at the rate set for the tier. This structure helps a company to ascertain costs more accurately and have a higher reward for only performance that exceeds targets.
• All credits are paid at the rate of the highest tier achieved. This structure provides a higher incentive for the sales team to remain motivated throughout an entire measurement period.

2. Matrix: A matrix structure is used to better align multiple objectives in a compensation plan. In a matrix structure, a sales rep needs to meet certain minimum targets in different measures to receive a bonus. This promotes a more balanced selling and provides a better means to drive behavior.

3. Flat amounts: Flat dollar amounts are used mainly to reward reaching a certain target. Once a target is achieved, reps have no incentive to sell more. Thus, flat bonus structures are used in combination with other incentive structures to hit certain targets while also driving additional sales.

Structure incentive plan to align with organizational goals

It is important for organizations who are struggling with sales performance issues to review their current incentive plan structures. Misaligned commissions plans coupled with ineffective bonus plan components can lead to disastrous results. Both elements are key to eliminating challenges directly related to motivational pain points experienced throughout a sales cycle

If your organization is currently experiencing challenges with sales incentive plan design, our strategic services team can provide industry insights and best practices to help you achieve sales program excellence. Contact us today to learn more.