SALES MANAGEMENT:
5 Steps to Drafting a Comprehensible Sales Commission Scheme

Sales is hard work. You probably won’t find a career as specific when it comes to people and their salary. Sales departments are usually the loudest and liveliest in a company. The people in them are hungry for and motivated by money.

Therefore, pay a lot of attention to your sales commission scheme. You need to set it up the way it’s reasonable for your business and achievable and motivational for your sales representatives at the same time.

Let's dive in

First things first

1. ESSENTIAL THINGS TO KNOW

BEFORE you start drafting a sales commission scheme. First of all, we want you to understand that every leader struggles with commissions first. It can take up to years till you find the ideal type of commission scheme for your company.

It can be a painful, long process to you reach perfection, but you'll speed it up if you make the commission scheme:

• Aligned with the company target. You and your sales team should head in the same direction. Do you want new customers? Make your sales representatives get them by setting their commission to it. Do you want to go abroad? Set the commission to specific area customers. Even though, for example, generating revenue by upselling the current ones would be more comfortable, their focus and motivation will be on where you need it.
• Easy to understand. The more metrics, the more confusion. Keep it down to several metrics to ensure the sales representatives know where they’re heading and what is the amount they’re going for.
  
  

Fair in two ways:

• To the other team members - sales representatives in the same position, in the same location, with a similar performance should also have a very similar or the same remuneration
• To whom you’re setting it - set commission only on what the sales representative can directly influence. It would be a mistake to set the SDR’s (person responsible for generating new meetings) commission on the amount generated in new businesses by the entire department, etc.

What if we have NOTHING?!

2. HOW TO DESIGN A SALES COMMISSION SCHEME FROM SCRATCH

There are several steps in setting up a sales commission scheme. To make the set-up more tangible, we’ll provide some examples along the way.

Your company goals

The first step is to establish the company sales target and decide what channels they’re going to come from - new sales, retention, upsell and cross-sell.

Sales roles and responsibilities

Decide what kind of sales roles you need in your sales department. Set the individual duties and sales targets. Don’t be shy to create a table - there will be more.

On target earnings (OTE)

Meaning how much can salespeople in these individual positions earn. Keep adding to your table. Here you have to consider your market specifics, such as industry, location, and the sales person’s seniority. We can’t give any financial indications in this step.

Fix to commission ratio

You should always set a variable amount (commission). The more the sales representatives work, the more they can earn. This is an obvious plus of being (and staying) in sales. However, don’t substitute sales representatives’ salary for the variable in 100%. Even though people in sales are quite often hunters and risk-loving people, they still need to pay their bills.

Two major indicators can help you set the ratio:

• Sales Cycle - The longer the cycle, the higher the % of the fixed amount should be. That could apply to people selling, for example, complex SW solutions to banks. On the other hand, you can lean towards the variable part more when having a short sales cycle. This is common in companies selling insurance or phone plans.
• Location - While in the US, most ratios are 50:50, in Europe, a more typical scenario would be 65:35.
  
  

Bear in mind that in SaaS, the commission should be between 4 - 6 times more than the sales representative’s salary. That’s a healthy amount for them to deliver and for you to pay.

Commission calculation and the pay-out frequency

The frequency of paying-out the commission correlates with the sales cycle. Let’s take the complex SW solutions VS phone plans example again: It might take year/s to sell a solution to a bank, and there are not that many customers for this segment. In this case, the commission pay-out frequency can be once a year. While selling phone plans, the sales cycle will take up to 2 weeks, and the customer base is broad. Therefore, you can give commissions every month. Deals with sales cycles somewhere between these two scenarios can have a quarterly payout (Quite the standard in B2B software sales).

Don’t cap the commissions! And if you already have, uncap it. It’s been proven that uncapping can increase the performance of the whole company by 8%. Having a cap can genuinely harm your revenue, as it’s very demotivating for people who have already achieved their sales target. What should motivate them to achieve more if there’s no reward? Moreover, in the upcoming year, you’d probably raise their target by a lot if they reached more now, so their lives would be just more difficult for nothing.

Now, let’s look at the table below, showing the three most common commission schemes in B2B sales. Explanation below the table.

• Flat - Commission type is relatively easy to set up. From whatever the sales representative delivers, s/he gets a 10% commission.
• Acceleration - Has the same OTE as “Flat”, but there’s a different way of getting to it. From the first 600.000, the commission is substantially lower than above 600.000. When delivering 1M, the commission is exactly 100.000. You can add a motivational 25% to anything that goes above 1M.
• Quota - To get any commission, the sales representatives need to deliver at least 60% of the quota. The lowest amount to hit and get any commission is 600.000.
  
  

Situations to consider over the target period:

• Onboarding and seasonality - In the first few months, there will probably be no delivery on the new employee’s side. Expect different performance in their Q1 and Q4, and adjust the sales targets accordingly.
• Plan cumulation in a yearly focus - Whether the sales representative generates a loss or a profit, it cumulates over the year. When the target is 250.000, and only 200.000 is delivered, the loss falls into the following period, most likely a quarter. Instead of the expected 250.000, there will be 300.000 to deliver.
  
  If the sales representative hits 300.000 instead of 250.000, the acceleration commission is paid-out at the end of the year.

How to start

3. INTRODUCING THE COMMISSION SCHEME TO SALESPEOPLE

It’s crucial, but sadly quite often neglected, to formalize your commission scheme so that you and the sales representatives have a clear overview and calculation of the expected sales target, what they had already delivered, and what kind of commission they can expect from it.

When introducing it, sit down having enough time planned, and explain the goals and reasons behind the calculations. Give expectations and specific examples of how it can be reached - by new sales, renewals, inbound, etc. Make it as concrete as possible so that the sales representatives believe they can fulfill it.