How to Build a Sales Commission Program: 10 Lessons (Part 1)
This is Part 1 of a 2-part series on building a smart sales commission program. Part 2 offers various scenarios for creating and incentivizing the right program for your business.
It’s time to talk about hiring a salesperson. Yeah, I said it: the S-word.
For whatever reason, this truly essential job causes so much anxiety for some people that it sometimes shows up in disguise: account executive, client services professional, business development specialist, strategic account director, customer success guru, the list goes on.
Whatever you want to call it, the actual role varies widely, as simple as directing shoppers to the USB cables or as complex as undertaking a 6-month process that involves flying circus animals to Denver because the customer had a few drinks one night and mentioned that they would love to ride a camel some day
No matter the types of shenanigans involved, however, the endgame is the same: Buy Now. And in order to make that happen, you need a sales force.
We’ll give you some tips and tricks for establishing a smart sales commission plan in Part 2 of this series. But first, you need to understand the psychology that drives most sellers, and what NOT to do.
Lesson 1: Incentivize profitable sales, not all sales.
Let’s say you decide to give your deli counter sales person 10% of all sales to encourage them to sell more. Easy peazy, wonderful, right? Except…not all sales are equally profitable.
If they sell a $10 hotdog that costs $9 to make, there is $1 in profit…and it’s instantly gone to commission. If you sell a $3 can of Coke that only cost you 25 cents, you make $2.75 but they only earn 30 cents.
So you’ve incentivized them to sell hot dogs, but you only make a profit when they sell cokes. Your job is therefor to make sure you incentive *profitable* sales, not all sales.
(Side note: In real life, I once coached an IT company whose salesperson almost drove it to bankruptcy. About 80% of this company’s sales volume was very profitable recurring, annual IT services, and about 20% was low-profit equipment to support their IT sales. They incentivized their sales person on volume, thinking he’d sell roughly the same mix, but he did the math and instead sold a multi-million dollar deal to a school district to replace all their classroom computers. The deal was 100% low-profit hardware, 0% IT services. Even worse, it was non-recurring, so it wasn’t even like he’d won them a nice new customer.
His sales commission on volume was bigger than the entire profit on the deal.)
Lesson 2: Keep it simple.
Imagine you’re a deli worker who’s told that you’ll make 3.5% of the first 18 sandwiches, but only those with chili add on, and only if they’re part of a combo that *does not* include a Diet Coke… at what point would you stop even caring because you have no idea what the actual incentive is? Any commission you earn would just be a happy accident. (Multi-level marketing companies are notorious for commission structures that are so complicated sellers just wait for their paychecks and hope for the best.)
If you want your sellers to be motivated to sell, make it easy for them to calculate – in their heads, in real time – the amount of money they’ll earn from making this sale. Make your incentives so real that they can see the amount in their bank account.
Lesson 3: Pay your sales team ASAP.
So you tell your sales reps that there’s a new incentive! They can literally *double* their salaries…if they sell $100,000 in potato chips this year.
Sounds great, but it’s only January.
With that long of a lead time, Ghandi himself may not have the perseverance to work hard in January for a reward he wouldn’t see until December.
Instead, pay out commissions as frequently as you reasonably can, but no less than quarterly. Ideally, the timeframe for paying out should match your sales cycle. At a deli that’s about 5 minutes, which means daily payout. (If that’s too complicated it’s okay to wait a little bit longer, like a week, but it should be fast.)
Payouts can be quarterly for longer sales cycles, but that’s the absolute maximum if you want your incentive to actually influence behavior.
Lesson 4: Set up a quota-free plan.
Before you make a salesperson wait to get paid until they meet a quota, put yourself into their shoes – specifically, their running shoes. By setting a minimum, you’ve just told them that it’s time to run a race, but the starting line is a mile in front of them. They have to run as hard as they can from the start, but it doesn’t count until they cross a start line that they can’t even see right now.
Would you sign up for a race like that? Neither would I.
And I can hear your “But…” from that mile away, but it’s possible to start paying out immediately if you ladder the incentives: Pay 1% at first, then 3% at a higher number, then 5% on down the road. You’re still being conservative until the quota is met, but your sellers don’t feel like they’re exhausted before they even begin,
Lesson 5: Keep changing it up!
If your 2024 sales incentive is the same as your 1994 incentive, your sellers have stopped paying attention. Can they do the math in their head by now? Yes. Do they know what their paychecks will be? Yes. Are they bored out of their minds? Also yes.
Sales folks need new and exciting goals to chase in order to stay motivated, so even if your core incentive program stays the same, it’s easy to change things up a little. If you gave them an extra $1,000 for selling Software Package A last month, offer a steak dinner every time they sell Software Package B this month. If you had a head-to-head competition between groups of sellers one month, offer a group incentive this month.
Lesson 6: Tier your incentives.
If a salesperson makes exactly the same commission on their first dollar as they do on their 100th, they have no reason to reach. (And stretch goals are a good thing!) If you offer a 1% commission on the first $1 million, make it 2% on the second and 5% on the third. Always have a “level up” point that your salespeople can see within their grasp.
Lesson 7: Get your ratios in the right balance.
Sales incentives are up to you, and they can range anywhere from 99% salary, 1% commission to 100% commission. The right mix is usually determined by the type of product being sold and one question: How much do you want your salespeople to be “pushing” sales vs “supporting” them?
Here’s the difference: If you’re only able to pay your mortgage if you sell a service contract to this customer… you’re going to find a way to do it, even if you know it’s not even close to something they need. You’re not getting evicted because this customer won’t buy an extended warranty on their fridge, and you wouldn’t be alone.
However, if all your bills are covered and commissions go straight into your fun-money fund, you’re going to be a friendlier, more considerate and less likely to be that icky kind of salesperson that pushes products on people that they don’t need. You’ll establish better long-term client relationships, too, which leads to more commissions.
There’s no magic formula for establishing balance between sales and commission, but one thing to consider is how “hungry” you want your salespeople to appear when they’re talking to customers. (If you’ve ever been assaulted by someone spraying perfume on you in a department store, that’s a level of hunger that no one needs.) If that doesn’t sound appealing to you, then tilt the ratio toward salary.
Lesson 8: It’s about more than percentages.
As business owners, we think about percentages a lot. NOI, gross profit, marketing budgets, the list goes on. It’s natural to think about your sales commission structure in percentages too, but it can actually make things more complicated.
Here’s an example: You have a salesperson who sells roofs to homeowners, and their commission is 5% of the total sale. They sell a new roof for $10,000 and know they’re going to get $500 – so far, so good.
But after your roofing team gets to work, they discover water damage and that $10,000 roof now becomes a $20,000 roof. Your salesperson’s commission just doubled too, but they had nothing to do with the additional work that’s now required.
Giving them that extra money provides no incentive, because there’s nothing they can do to ensure that same amount of money on the next roof they sell. Offering commission only on the initial sale amount, however, creates a salesperson who’s incentivized to oversell at the slightest hint of a potential problem: “Normally this would be a $10,000 roof, but it rains a lot here in Portland and you may have unseen water damage, so let’s say $15,000 just in case.”
That’s great if there’s water damage. But what if there isn’t? Do you refund the customer the extra $5,000?
It’s a conundrum, but there’s an answer: the spiff. Instead of giving your seller a percent, just give them a flat amount, like $500 for every full roof replacement sold. Then, no matter how much the roof costs, the salesperson is motivated to sell the right product. (And party bonus, it’s the easiest commission math ever.)
Lesson 9: Leave the salesforce out of pricing decisions.
Salespeople sell. It’s their superpower. Pricing, however, is not. I’ve seen salespeople talk their supervisors into the most convoluted, complicated, technically inside-the-rules, please-boss-I-beg-you-just-this-once pricing changes that make the job a total money loser for the company.
The same goes for finding “new” products to sell: “Okay boss, I know it’s not our product, but our team could do it, right? Just this once?”
Here’s the bottom line: You, the business owner, tell your sales staff what they can sell, and at what price. Period. That’s not to say you can’t implement a feedback process that they can use to let you know about market trends and suggest adjustments, but that has nothing to do with their current, in-progress sales.
Lesson 10: Don’t let hunters become farmers.
There are two kinds of salespeople: hunters and farmers. Hunters go out and land new business, while farmers tend to – and hopefully, grow – existing business. As soon as someone has paid your hunters even $1, they are now in the hands of your farmers.
Many hunters get fat and happy by simply selling to their existing clients over and over again. It sounds like something like, “Hey, I made my quota by selling annual maintenance contracts to the same clients I sold last year, I’m going out for golf!”
If you have a team of hunters, this means that you should focus your commission structure on bringing in bright, shiny new objects instead of renewals. Recurring business? That’s for your farmers.
The Bottom Line
Now that you’ve done your homework, it’s time to put your skills to the test and build a sales commission. In Part 2, you’ll find everything you need to get started.
How to Build A Sales Commission, Part 2
Should I Offer Profit Sharing With My Employees? In a Word – No.