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Dear Workforce What's the Secret To Equitable Commissions

How can I create a fair commission structure for advertising sales or association memberships?
April 9, 2004
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Related Topics: Variable Pay, Dear Workforce
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Dear Making Happy:

Cash incentives are a common way to motivate your sales team to achieve your revenue goals. As long as accounts and territories are evenly distributed among salespeople, you can create a one-to-one relationship with revenue and commission. However, it may be helpful to look beyond the quantitative aspects and build a long-term vision for your sales team. There are a number of factors to consider, including:
High volume/small deal vs. Low volume/big deal
Depending on the type of customers you want to find and retain, is it important to differentiate the two?
Markets & territories
What type of customers from specific markets, territories, and industries do you want to sell?
Pipeline
How important are future sales and longer term plans? How does this factor into your growth expectations and annual targets?
Profitability
Is there a cost factor that makes some deals more profitable than others? If there are expenses incurred in securing deals, you may want to include the evaluation of profitability on sales.
Total compensation
You should define the total compensation package you would expect to pay a salesperson who meets preset goals. This is to ensure you are not under-compensating or over-compensating any one individual.
Divide & conquer
As mentioned before, you should determine if any one salesperson has an unfair advantage over another--not in terms of skills but in terms of pipeline of customers. Are good territories and/or customer lists given to a minority of salespeople? If so, this would make it easier for that one salesperson to meet his/her revenue targets. You can either re-divide the sales territories/customer lists or acknowledge this and define a different incentive for new vs. old customers to level the playing fields.
The other fairness issue to review is sales manager compensation. It's dangerous to have managers on the same commission structure unless territories/customers are specifically defined. Because managers have influence over their staff's accounts, they may be able to handpick solid leads and accounts for themselves.
Commission pot
A "commission pot" may work well. You can rank the importance of each of the factors (revenue, pipeline, customer type, etc.) and create a total percentage of base pay. You could, for example, have a commission pot of 50 percent of base salary. This would be paid periodically if a salesperson meets the overall goal.
Lastly, put yourself in a salesperson's shoes. You need to make the formula easy to understand, and the goals you set should stretch the team without it being out of bounds. If you have trouble explaining it to someone else, it probably is too complicated.
SOURCE:Don Gaile, principal, dmg consulting company, New York City, April 16, 2003.
LEARN MORE: Read a similar Dear Workforce article oncalculating geographic pay diversity.
The information contained in this article is intended to provide useful information on the topic covered, but should not be construed as legal advice or a legal opinion. Also remember that state laws may differ from the federal law.
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