Sales commission plans dictate your sales team’s behavior. The right incentive plan could boost your sales performance by 25% to 44%.
Sales commission plans dictate your sales team’s behavior. The right incentive plan could boost your sales performance by 25% to 44%. However, there are also risks. A poorly built plan can result in underperformance or increased staff turnover.After talking to industry veterans—both managers and sales reps alike—we crafted this list of the top 7 mistakes we’ve seen in incentive plans. We also included best practices to avoid each mistake.
Finding new clients is hard, and sales reps can often more easily increase revenue with existing clients. If your incentive plan equally rewards both, your reps will focus their efforts on expanding accounts, rather than finding new customers. This is a risky approach that might boost short term revenue, but it will hinder your long-term growth.
If you give high rewards to your reps for bringing in new clients, without considering their quality, you are taking significant risks. A scenario that we’ve seen multiple times in VC-backed companies: At first the company performs well with great revenue growth. But then some customers start to churn - first a trickle, and then a flood. What’s happening? The problem is that the plan was incentivizing the reps to aggressively overpromise and target inappropriate customer profiles. The reps received commission immediately and the fact that many customers subsequently churned was none of their concern.
If plans are complex, they can be difficult for sales reps to understand. You don’t want your sales team wasting their time trying to calculate how much they can earn when they could be selling.
At the same time, every business is different. Your incentive plan should be customized to the specifics of the market, your company’s products, your sales processes, and your sales team, otherwise you are leaving money on the table. A “one size fits all” approach does not work in sales commissions.
Capping your commissions is a sign that you don’t fully trust your commission plans. Caps are common among fast-growing companies, or companies entering new and unpredictable markets. Due to the difficulties in projecting sales for the coming period, companies are concerned that the incentive plan might lead to extravagant payments for certain reps. The fix seems obvious: put a cap on commissions.
But by capping commissions, you remove the ability and the desire for sales reps to exceed goals. As a result, you will have trouble hiring and retaining top performers. Also, it’s likely to negatively impact productivity. Once a rep gets close to the cap, why do more work?
What we see regularly is that a new incentive plan is rolled out after the sales year has already started, without proper communication. These delays are often caused because discussions tied to the budget and projections at the end of the year are not completed in time.
Starting the sales year without an incentive plan is bad. To work on deals without knowing their compensation demotivates reps and it can lead to sandbagging (holding back deals). Sandbagging makes forecasting inaccurate and erodes the relationship between the manager and the sales rep.
Setting unachievable targets is detrimental to your team’s motivation and individual performance. Your top performers will be the first to seek out a new company if they can’t see a clear path to achieving 100% of their targets. Motivating your reps takes careful planning and target setting, not a “shoot for the stars” approach. It’s also important to avoid incentives that rely too much on factors outside of someone's control. This can be demotivating, for example when the BDR only receives commission if the AE closes the deal.
If your reps have to wait many weeks or even months after a sale has been completed, you’re diminishing the impact of your incentive plan. Behavioral science shows us that a short interval between the achievement and reward best promotes the desired behavior. This is because there is a clear connection between the achievement and the reward.
We’ve come across extreme cases where the reward is almost completely disconnected from the achievements. One example is an incentive plan with an annual bonus at the end of the year for achieving an annual revenue target. The plan paid fixed advances to the reps every month, irrespective of performance, with an end of year true-up. Such a plan is very convenient to administrate, but does almost nothing to motivate reps.
Sales targets should advance company goals. When they are set with the bigger picture in mind, they can align the interests of an organization, its teams, and constituent members.
To measure a company's gross profit accurately, all costs must be allocated to either product costs or period costs. So, which category does sales commission fall under?