Why Complex Commission Plans Are Hurting Your Sales Team

Many companies don’t desire to create complex commission plans, as business needs change some plans become complex overtime.  Typically, a company will have a simple sales compensation plan to start.  Then, as the company grows, and goals shift, the compensation plans change – which is best practice.  However, what tends to happen is that some companies, instead of aligning the plans to the top priorities for the year – create plans that cover all possible sales or scenarios, sometimes including operational responsibilities. 

Many of us know that every role has various responsibilities.  However, the sales compensation plans should not include all responsibilities for each role, but rather the top 3 revenue generating responsibilities the company wants the role to focus on.  And, those 3 items should be aligned with the company goals for the year.  Now the max is 3, but you can lower the pay elements or measures to 2 or 1 – the lower the better.  The reason for the max of 3 is linked to the “Rule of Three”.  Most people can remember 3 things without studying.  This rule is applied by many businesses today, and holds true for sales compensation plans as well.  Reason being is that if you have more than 3, it may create confusion and distraction in your sales team.

The result of complex plans are lack of focus and de-motivation.  Many businesses ponder the question “how to motivate a commission based sales team”, well there are many ways to motivate sales teams, but one of the best ways is to keep sales comp plans simple.  When you put too many things into a comp plan the salesperson will have to focus on too many items to earn their target variable.  There are too many checks and quotas to hit to earn their livelihood.  As an example, entering CRM data, its important for leadership visibility, but it should not be linked to someone’s variable pay and is typically covered in the base salary of the role.  Let’s look at another scenario, what if the comp plan has 5 products the company wants the employee to sell.  Two of the 5 products are more profitable, but the other three are an easier sale.  Some sales team members may focus on the easier products, which makes sense, and earn their target incentive just by selling more of the easier products.  They will receive their target pay, but the company will not hit their overall revenue objectives.

So, what should be in the sales compensation plan?  Only the top 1 to 3 pay elements (or measures) for the plan period that leads to revenue.  All other important, but not as important, responsibilities should not be part of a sales compensation plan.  In the example above, one option a company can do is create two pay elements, put more weight on the product that is linked to goals of the company for the year, and bundle the other products into 1 pay element since these other products also lead to revenue – just not top priority.    

What some companies tend to forget is that the sales compensation plan is not the only tool used to manage performance, there should also be an annual performance review that is tied to the responsibilities in each role that each sales employee should have with their manager.  The compensation plan should be focused on revenue-driving items.

Your sales compensation plans should be simple enough so that your sales team can estimate how much they will get paid for a sale.  Your Salesforce should be able to calculate commissions without writing complex formulae in excel.  Many sales team members actually create their own excel or google spreadsheets to figure out how much they should get paid.  And the more complex you make the plans, the more time they will spend on this.  Complexity brings confusion, and if they don't fully understand the comp plan how can they work towards it?  Also, there should be a commission tool or calculator they can leverage to plug in sales to estimate their commission.  This way they can focus on selling.  Time wasted on items they shouldn’t have to do is money left on the table.  Complexity will lead to time wasted, de-motivation and the possibility of revenue objectives not met.

Do you have an overly complex sales comp plan?  If so, take a deeper dive into what should be the top focus for each role and remove all the other items.  That way you align your plans to the behavior you want to incentivize and keep the team focused on the top priorities.

This may sound challenging and you maybe asking do sales incentives actually work?  Yes, they do, as long as you keep them simple and structure them appropriately.  You can find out more with our sales comp online course here, which has a downloadable sales commission estimator, simple commission agreement sample, plus many other helpful resources to structure effective sales compensation plans.