Unfair Commission Structure?

Have you heard this before?  Working in sales compensation over the years, I have heard this comment a few times from people who work in the industry.  Businesses are sometimes challenged by their sales teams with this question.  In some cases, the salesperson maybe correct.  But what is fair?  Let’s start there.

What is “fair” in the eyes of the salesperson versus the company may vary.  The salesperson may say “I am not being compensated appropriately for my efforts” and the business may respond “it is fair based on how we are paying others in the same role”.  This is why we have to take a balanced approach when it comes to sales comp, fair to sales and fair to the company.  What this means is that sales comp decisions are not just based on what the company desires, along the same lines, it is not solely based on the sales teams’ desires.  The company’s objectives are the starting point in plan design, but the sales organization, quotas and comp plans should be setup in a way that makes it possible to accomplish those objectives.   

For a commission structure, a sales rep receives a payment per unit sold.  If it is a cost of sale approach, where everyone gets the same commission rate per sale, then that is a “fair” commission plan, no issue there.  However, if each person has a quota, then this is where the challenges may arise. 

As an example, if two people are in the same role with the same pay, and one person has a quota of $500,000 (total sales they need to generate) and another has a quota of $1,000,000, would you consider that fair?  This variance in quota can cause some issues within the sales team because the commission rates will be drastically different.  Now, some leaders may argue that the person with the $1,000,000 quota has more opportunity which is why their quota is significantly higher.  That makes sense, however, what we also want to consider is capacity per employee (which factors in deal size, time to close etc.).  As an illustration, if the average deal size is $20,000 then that means one person will need to close 25 deals and the other 50 deals.  What if, due to the sales process, a salesperson can only manage 30 deals?  This is where the plan is fair to the company (because quotas are distributed) but not fair to the employee (because one of the employees cannot attain their goal and earn their target incentive).

There are two ways you can manage this, one – hire more employees based on capacity per employee.  A company’s revenue goals will generally go up.  As a company grows, so should its sales and support teams.  Secondly, if a rep has more responsibility than their peers then they should be in a different role.  With a different role comes the corresponding pay or compensation.  Now for sake of clarity, there are brackets in revenue generation as it relates to pay.  If a salesperson’s quota goes up by $20, this generally doesn’t result in higher pay.  The target pay is a reflection of responsibility, years of experience, quotas and the market – what is the market paying a salesperson who closes $x in sales?   You can determine the target pay for a sales professional from a compensation survey.  A compensation survey allows for sales compensation benchmarking, which will inform a company if their sales team members total target compensation is in line with market.

With these general suggestions, you will have some added cost, but you will enable the sales team to achieve their goals and therefore boost employee morale.  Which, as a result, will lead to the financial results you desire (all else being in good standing) and possibly more revenue to cover the additional cost.  A sales compensation plan is used to incentivize behavior, so if your sales team is not motivated because of an unfair commission structure then it’s better to fix it or money will be left on the table. 

Also, an underlying issue that could be a cause for the fairness issue is communication.  If the salesperson doesn’t understand the sales compensation plan and how they can realistically earn their incentive, then they will not see the plan as achievable or fair.  Therefore, for new plans, its best practice to create a clear communication schedule with an official plan rollout.  In the plan rollout, show the sales team how they fit into the company’s vision and goals, and the reason behind the sales comp plan structure.  Break down the achievability of the plan.  If it is an annual sales comp plan, then demonstrate how they can achieve it by quarter, month, etc.  Give them examples of what their pay will look like in different scenarios.  Show them they are not alone in the sales process, that the company and leaders stand behind them to support them in their goals (which is the company’s goals).  You can encourage your sales team just by being transparent, which will build trust for better performance. 

If you need help designing a sales commission structure or plan communication, we have a downloadable plan rollout presentation, sales compensation plan template and a commission calculator you can use in our course here.