This post is by Mr Phil Pemberton, a Business Development Director at Vertex Data Science in the UK.
There is no universal mechanism for incentivising sales professionals. Much depends on the nature of the business, its sales strategies, market, products and services, competitive landscape, etc.
The sales commission plan must be aligned to, and help achieve, the business plan - are you looking at revenue growth, increased profitability, increased market share, introduction of new products and services, the available budget for sales and marketing, etc.
In a traditional direct sales channel where the vast majority of sales come through frontline sales staff, it may be appropriate to have a single sales commission plan. In other scenarios, the plan may need to include a wide range of staff that contribute to business development - from marketing through to delivery and account management.
In order to get everyone in the organisation pulling in the same direction, reward/bonus structures based on achievement of business plan as well as non-financial measures spread across a wider leadership group is relatively common. A percentage of revenue accumulates in a bonus pool to be shared amongst eligible employees. Long term incentive plans have similar qualities but tend to pay out after 3/5 years based on achievement of longer term goals.
Back to individual sales commissions: In my experience, the following have all worked to some extent:
1) Individual sales person is paid a percentage of total contract value (for high margin products, 3-5% is common). This is simple to administer, unambiguous, but does rely upon there being a clear understanding of the company's cost base, product cost-of-sales, product margins, etc. It is best suited to product sales where pricing, cost of sales, overhead allocation, margins is relatively transparent and static. For more complex services, this is often seen as an unsuitable approach simply because the contribution (gross profit margin) achievable in reality varies from one sale to the next and is not readily determinable at the point of sale.
2) Percentage of gross profit (4% of contribution is a good benchmark for high value, low margin sales). This approach incentivises on maximization of profits and thus discourages discounting and price dumping by the sales lead in order to close the sale.
3) Sales commission pro-rata to achievement of agreed sales targets. This approach rewards performance over a period (month, quarter, year) rather than the individual sales transaction. It is normal practice to only reward performance that exceeds target or an agreed threshold - this is typically 50% of the overall sales target. So for example, if an individual has an annual sales target of £10million and she actually sells £6M at the end of the sales period, she would be awarded 60% of her bonus entitlement as she met the threshold (£5M). In this approach, an On-Target-Earning (OTE) figure is used as the bonus level. It is reasonable for pure sales roles to have an OTE at 100% of base salary. Therefore, achievement of target would earn the sales person the equivalent of his basic salary as a bonus. Overachievement of target would be paid pro-rata, with usually an earnings cap at extreme levels (c. 300%+ of OTE).
There are also team/group reward pools and the ilk.
Some organisations reward sales people on a mix of performance indicators - overall earned revenue is usually top priority, but other factors may include profitability, in-period revenue/profit, personal development KPIs, tie-in to overall business plan, etc.
Unfortunately it is still all too common to find successful sales people not paid commission due. Most sales plans are deemed discretionary (although law would support the claim for unpaid commission where the individual had worked with a reasonable expectation of it being paid). Worst still, is the practice of changing sales targets such that the sales person's success has diminishing returns over time.
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