Structuring commission plans is tricky business! I hear it all the time, as we work with our clients to help them automate commission calculations – a huge hassle that sales management software can alleviate. While our work with clients is focused on configuring workflows and logic statements to run accurate calculations, there’s really a much bigger question that we also love to talk about – what their commission plan structure should actually consider.
Designing commission plans that are most beneficial to your security company, as a whole and to the salespeople who work there, is truly an artform. There’s no one-size-fits all approach, and obtaining optimal results requires monitoring and tweaking over time. Even so, there are common challenges facing security sales teams that we see all the time. Those common themes point toward certain best practices that I’d like to share here, as you seek to develop commission structures that work best for your organization.
Commissions are Meant to be Paid
The whole point of commissions is to motivate salespeople to work their hardest. That means that with a reasonable amount of effort, associated sales goals must be attainable. Everyone wants to be paid, and paid fairly, for what they produce. If the bar is set too high, salespeople will simply become frustrated and give up. And on the flip side, without lucrative rewards for reaching stretch goals, they have no incentive to really push themselves.
Plans should be structured differently for residential and small business sales versus large commercial projects. Here’s a bit of research to guide you. A 1985 study in Marketing Science1 found that companies can pay salespeople a larger percentage of their total compensation as commissions if the products they’re selling are high volume and have a relatively short sales cycle. Think “residential alarm sales” and “small business sales.” Today, this still holds true. Salespeople may receive a relatively low base pay however, the sales volume, shorter cycle and commission rewards produce a solid and steady income. By contrast, companies selling complex solutions with longer lead times and harder-to-close sales, where external factors may sink an opportunity through no fault of the salesperson, typically offer a higher base salary in order to attract and retain top talent that can tackle the longer or more complex sales cycle. Think “commercial systems integrators.”
In any case, you really don’t see salespeople “gaming” the system. Research supports this as well. The fear that a salesperson will push the close date out on some sales, where they’ve reached quota for a particular period, may happen but, it’s rare. For most in this industry, their sales are just not that predictable, and salespeople want to close all the business they can – not just to win those sales but, to keep their accounts satisfied. There is a close relationship between happy customers producing more and higher quality referrals.
In general, there should be no limit on earnings, as earning caps negatively impact the mindset and productivity of all performers and are a definite negative to top performers. This is also backed up by research. An analysis reported in Quantitative Marketing and Economics2, based upon data from Fortune 500 companies that use commissions to compensate sales employees, showed that by eliminating earning caps of top sales performers, companies can see revenue increases of as much as 8-9%.
As for timing, it’s good practice to pay salespeople a certain a percentage of their commission up front, when a job is won and booked. This provides positive reinforcement for closing the deal, and then motivates them to remain active in the account after the contract is signed to ensure they receive the balance due.
Commissions Only Go So Far
Having a fair, transparent commission structure is important for employee morale. The watercooler effect is real, and chatty employees will quickly know if they’re playing with a deck that’s stacked against them (“I’ve got a ‘bad’ territory”), or are subject to different rules than their co-workers (“Her quota is half as much as mine!”). But that doesn’t mean that all employees are motivated in the same way. Top performers, new hires and average performers approach their jobs with different mindsets, and therefore are influenced differently. It’s important to understand where commissions fit vis-à-vis other factors that keep employees eager and motivated.
Top performers are self-driven. Not only will they hit their goals, but they will raise their own stakes. They thrive on meeting new challenges. For these employees, it’s critical that you provide them with the support they need to succeed. They know what they’re capable of, and they will not stick around at an organization that is “bringing them down.” Pay them on a timely basis, and do not nickel-and-dime them. It will ruin their trust. Also, show that you value their opinions and insights. Ask them which markets to develop further, or how to improve the pace or direction of the organization. Your success relies on their success. For these employees more than others, you need to show your appreciation in ways beyond a generous commission plan. And as for ratcheting quotas … don’t do it. In the long term, it’s training your top performers that they will be penalized for overperforming. If they’re exceeding their mark, year after year, then good for them! They’ve earned it. Making it harder for them to succeed will sour their attitude.
New salespeople pose very different challenges. You are making an investment in them, and it will take some time and resources in order to see meaningful returns. It’s important to clearly define expectations and provide steady mentorship to these employees. Make sure they understand your sales process workflow, and the tools in place to support their efforts.
These new employees may start at a lower base pay than their experienced counterparts. However, the upside should be high in rewarding them for success – especially for meeting goals that are most important to the company. A tiered commission structure helps motivate salespeople to hit goals and, as they continue to succeed, the return gets progressively higher.
For the last category of salespeople – those underperformers who just aren’t hitting their goals – the commission plan you have in place isn’t driving the performance you need. In order to see improvement, your sales leaders need to work closely with these folks to develop a detailed plan of action that includes time constraints, specific goals, and specific rewards for hitting goals.
Here’s a great analogy. The author of a 2014 study in Marketing Science3 describes the differences between working with top performers and underperformers as similar to how teachers motivate their students4. Top students will stay focused throughout the semester, attend class, do the readings, and would do quite well if their entire grade were based upon a single final exam. By contrast, the students who struggle perform better if they are held accountable by pop quizzes, are graded for attendance and class participation, and given on-going external incentives to stay on track.
Translating these findings to a security sales environment, sales managers should work with underperformers to develop prospecting plans that include a list of required weekly activities, “X” number of appointments and visible tracking of what occurred. Specific types of sales, markets or prospects need to be part of their target. Gross profit margins and recurring revenue or contract goals must be defined. The workflow process, including the next steps that they are responsible for throughout the plan, should be reinforced, and they should have visibility into what commissions they can expect as they create estimates and hit their goals. And their activity must follow a consistent cadence, including no missed meetings with their sales leader who is working with them to stay on track and monitor progress. In terms of commissions – it’s been proven that more frequent payoffs work better with these folks – quarterly or even monthly.
As your average performers begin to master these steps, they should begin to make progress toward reaching more of their goals. Sales leaders should point what’s working and encourage the salespeople to be self-reflective. Do they see a difference between cases where they are being successful and those where they are not? Are there things they could have changed in their behavior that would have made the “failures” go down the “success path” instead? Having these discussions, setting new goals, and taking corrective action to see results quickly is key. If you’re doing all this and it isn’t working, it may be time for this salesperson to part ways with your organization. But, on a positive note, the effort you put into helping an average performer move the sales needle will have a greater impact on your company, as a percentage of revenue, than spending resources pushing your top performers. Those top performers are already selling at or close to capacity, so focus your energies where you can make a more significant impact.
We’d Like to Know!
Tell us what your organization is doing right to motivate your salespeople? What helps you recruit top talent and keep it?
Be sure to check back soon for Part II of this topic, where we’ll discuss compensating inside versus outside salespeople, structuring incentives to mirror corporate priorites, and the role sales software can play to make all of this easier to execute and manage.