Our customers often express their concern about remunerating salespeople. They share opinions such as “I don’t know whether the way in which salespeople in my company are paid is consistent with company objectives” or “I have an interesting candidate, their financial expectations amount to X — I don’t know if it’s a lot or not.”
The factors that determine the level of salespeople’s remuneration affect their actions and, consequently, the sales level in the company. In addition, an incorrectly constructed bonus model can generate disproportionately high costs for the company. In this article, you will find some situations which we have dealt with in recent months.
Lack of motivation to improve a weak month
A salesperson receives PLN 2,000 base salary and 10% commission if their sales in a given month is less than PLN 2,000 of new monthly subscriptions. If the sales amount to more than PLN 2,000, the commission on sales is 20%. The commission is calculated based on the first invoice paid by the customer whom the salesperson acquired.
Let’s suppose that the last week of the month begins and the sales of a salesperson so far amount to PLN 700 of new monthly subscriptions. Before the end of the month and until signing the contract, they have an opportunity to convince 3 more customers, which will allow them to increase the monthly result in total by additional PLN 800. For the sake of the example we assume that the salesperson’s sales next month will amount to roughly as much as their average sales, that is PLN 1,700.
Let’s take a look at the options that are available to our salesperson:
A: “I will try to acquire those 3 additional customers later this month, so my commission will be PLN 150.”
B: “Perhaps it will be better for me to acquire those 3 customers at the beginning of a new month so that I can increase my chances of reaching a higher level of commission next month.”
Option A
| Subscription for the first month of cooperation | Subscription for the second month of cooperation | Sum of subscriptions paid by a particular customer | |
|---|---|---|---|
| Company's revenue in a given month | |||
| Customers acquired in March | PLN 1,500 | PLN 1,500 | PLN 3,000 |
| Customers acquired in April | PLN 1,700 | PLN 1,700 | |
| Sum of all subscriptions paid in March and April | PLN 4,700 |
The commission is 10%.
| Commission for customers acquired in March | PLN 150 (10% of PLN 1,500) |
| Commission for customers acquired in April | PLN 170 (10% of PLN 1,700) |
| Sum of all commissions in March and April | PLN 320 |
Option B
“Perhaps it will be better for me to acquire those 3 customers at the beginning of a new month so that I can increase my chances of reaching a higher level of commission next month.”
| Subscription for the first month of cooperation | Subscription for the second month of cooperation | Sum of subscriptions paid by a particular customer | |
|---|---|---|---|
| Company's revenue in a given month | |||
| Customers acquired in March | PLN 700 | PLN 700 | PLN 1,400 |
| Customers acquired in April | PLN 2,400 | PLN 2,400 | |
| Sum of all subscriptions paid in March and April | PLN 3,800 |
Remember that when the salesperson’s monthly sales is lower than PLN 2,000, their commission rate is 10%, and when it exceeds PLN 2,000, the commission scheme provides a 20% commission on monthly sales.
| Commission for customers acquired in March | PLN 70 (10% of PLN 700) |
| Commission for customers acquired in April | PLN 480 (20% of PLN 2,400) |
| Sum of all commissions in March and April | PLN 550 |
| Option A | Option B | |
|---|---|---|
| Company's revenue | PLN 4,700 | PLN 3,800 |
| Salesperson's commission | PLN 320 | PLN 550 |
This model encourages a salesperson who values their commission more than the company’s well-being to select a scenario where the commission is higher even though it means lower revenue for the business. In practice (taking into account the salespeople’s average monthly results in this company), the commission scheme couldn’t be corrected so as to discourage them from acting against the company’s interest — a new scheme had to be created from scratch.
Conclusion 1:
Your incentive program must be designed so as to discourage salespeople from acting against the company’s interest.
Failure to achieve sales target is not reflected in a lower salary
In a healthy situation, the company has a specific revenue goal. But sometimes this isn’t the case. In one of the companies we consulted, the salesperson could count on a salary 2-3 times higher than the value of new monthly subscriptions they sold even if their results weren’t close to meeting their established target. Taking into account the results achieved by salespeople in this company, this incentive program didn’t motivate them to work harder. It happened despite the fact that every month without reaching the target made the company’s cash reserves dwindle.
Conclusion 2:
Your commission scheme must motivate salespeople to meet the target for the month/quarter/year instead of bringing joy in the form of dividends coming from past achievements.
Unnecessary target diversification for individual team members
As a rule, a salesperson’s efficiency should increase in proportion to their seniority in the company. After a period corresponding to the length of two average sales cycles, a salesperson should be independent and profitable. At the same time, dependencies aren’t linear. The difference in results between salespeople who have worked in the company for 3 and 6 months is much greater than the difference between salespeople who have worked for 14 and 17 months. Therefore at some point, salespeople coming from the same team and working on similar sales opportunities should have the same goals. In one of the companies where we analysed the methods of motivating salespeople, the commission scheme was based on the idea that two salespeople with similar capabilities had different sales targets. This situation creates a risk of potential conflicts in the team (“Why do I have to work harder than my team-mate?”).
Conclusion 3:
If two salespeople have similar experience in the company and work on similar leads, they should have the same targets.
Incentive program for new employees
When our customers hire new salespeople, they ask us whether conditions X suggested by the new employee are acceptable. Of course, it depends — to give a complete answer, we need 2 pieces of information:
1) Assuming that the salesperson doesn’t prove themselves during the trial period — how does the president/management board feel about the amount which has to cover the salary and related costs?
2) How much does the new salesperson have to sell to become profitable?
1) Supposing that the salesperson expects PLN 6,000 net base salary and 5% commission on the value of their obtained contracts. The sales cycle in this company takes on average three months, while the average contract value is PLN 200,000. To simplify, let’s assume that after taking into account the employee costs, the salesperson’s salary is a company expense of PLN 7,500 per month. To fully verify the salesperson’s skills, a period corresponding to the length of two average sales cycles is usually required which in this case means half a year.
| 1 | 2 | 3 | 4 | 5 | 6 | Total | |
|---|---|---|---|---|---|---|---|
| Base salary | 6,000 | 6,000 | 6,000 | 6,000 | 6,000 | 6,000 | 36,000 |
| Sales | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
| 5% Commission | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
| Company costs | 7,500 | 7,500 | 7,500 | 7,500 | 7,500 | 7,500 | 45,000 |
The amount you need to invest in a salesperson while knowing that the value of the contracts sold by them could be PLN 0, is PLN 45,000. The president/management board must assess how they feel with such a bet.
2) In order to become profitable, a salesperson should obtain contracts which margin will cover the costs related to their employment within a period corresponding to the length of two average sales cycles. In this case, it is enough for the salesperson to generate a margin of PLN 60,000. Having these figures, you should assess the possibility of the salesperson meeting such targets. However, you have to remember that due to its simplification, this example is only a starting point for more advanced calculations — the analysis will be more accurate if you also include the costs of organising a workplace (laptops, mobile phones, software, business trips) and opportunity costs (assuming that the salesperson will have a lower conversion rate than a CEO would have had, especially in the first months).
| 1 | 2 | 3 | 4 | 5 | 6 | Total | |
|---|---|---|---|---|---|---|---|
| Base salary | 6,000 | 6,000 | 6,000 | 6,000 | 6,000 | 6,000 | 36,000 |
| Sales | 0 | 0 | 0 | 0 | 0 | 200,000 | 200,000 |
| 30% Company margin | 0 | 0 | 0 | 0 | 0 | 60,000 | 60,000 |
| 5% Commission | 0 | 0 | 0 | 0 | 0 | 10,000 | 10,000 |
| Company costs | 7,500 | 7,500 | 7,500 | 7,500 | 7,500 | 17,500 | 55,000 |
Conclusion 4:
Analyse the model of a salesperson’s profitability and accept the risk associated with hiring someone new.
A model that can generate taking unnecessary actions to meet the KPIs
In one of the companies which we’ve consulted, the commission level was affected by whether the salesperson opened X% of their sales opportunities alone, e.g. via LinkedIn, cold emails or cold calls. The intention was to increase the salespeople’s initiative and thus generate more leads in the company. This condition creates a risk that the salespeople will process some leads just to meet the criteria of KPI — despite the fact that there is no strong chance for a transaction. In such scenario, the company motivates salespeople to waste valuable time.
Conclusion 5:
Your commission scheme shouldn’t provoke activities that don’t translate into increased sales.
Good practices that support any commission scheme
When we analyse commission schemes with our customers in their companies, we remind them almost every time about a few very universal matters.
“High-fliers” have different needs than “experienced salespeople.” A person starting their career in sales generally has low fixed costs of living and they can accept a commission scheme with a low base salary and high commission rates. The situation is different when the salesperson has gained experience during several years in sales and has increased their monthly expenses (housing, car, family). For them, the scheme where the base salary is high at the expense of lower commission rates will be more appealing.
A good commission scheme is not enough to discourage salespeople from consciously acquiring customers who won’t eventually be satisfied with the cooperation. A salespeople rewarding model should be supported by appropriate behaviour within the team, no tolerance for deviations from the agreed principles, and valuable leads (the salesperson won’t be able to acquire customers with a high chance for successful cooperation, if they don’t work with leads that might become such customers).
It is worth to mention that salespeople always outnumber people managing them. Usually the salesperson is more motivated to earn PLN 1,000 than their manager is to save the same amount for the company. Those who construct complex incentive programs put themselves in a situation where they have to defend the integrity of the program against much more motivated and numerous salespeople. It is then very difficult to defend the program against fraud — and even if you succeed, it will take a toll on the energy and focus of the managers in a disproportional way.
Conclusion 6:
The incentive program must be simple and supported by appropriate behaviour within the company
When designing an incentive model in your company, you must consider your salespeople’s motivations. A good incentive program is one that doesn’t encourage salespeople to act against the company’s interests, so first of all, it is worth analysing the manner in which salespeople are rewarded in that respect. The most frequently recommended model is one where a salesperson is paid their commission when the customer pays the invoice.
