Does Your Sales Commission Incent the Right Behaviors?

Your sales commission philosophy and sales commission structure are key tools to create both a healthy sales culture and a profitable organization. Sales leaders should read this article for a checklist to help you determine your strengths and weaknesses in your current plan.

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A federal court recently handed down a landmark decision impacting commission structures in the real estate industry. Cited in the WSJ, “The National Association of Realtors and several larger residential brokers were found liable for about $1.8 billion in damages for conspiring to keep real estate commissions high for both buying and selling agents and eliminating competition for commission rates.”

Your commission plans play a big role in creating the right sales growth and a healthy sales culture. As we’re seeing play out in several industries there can be significant consequences if they don’t get the focus they deserve. (Remember the $3 billion ruling against Wells Fargo in 2020 for fraudulent sales practices? )

While not to the level of a legal ruling, many organizations are guilty of incenting unhealthy sales behaviors:

• Pulling in end of quarter deals through discounting, only to erode revenue and profit.
• Accelerators that stop at certain attainment levels, thereby stalling deals into a new quarter or even a new year.
• Lack of structured sales territory plans, resulting in unhealthy competition between sellers over who “earned” an account or a sale.
• No CRM or a CRM incorrectly aligned to a seller’s territory, resulting in missed commissions and a lack of trust in the commission process.
• Offering-specific incentives that are meant to spur sales in one product category or for one audience but end up alienating core product lines or core audiences.
• Incentive plans that change mid-quarter or mid-year without notice or a good reason. These changes are suspected of being used to reduce expenses around sales commissions.
• Lack of clarity around commission levers such as revenue, profit, or a blend of both. This includes difficult calculations, or calculations based on performance levers not in the seller’s control.

Healthy Sales Culture & Profitable Bottom Line with Sales Commission

Your sales commission philosophy and structure are one of your key tools to creating both a healthy sales culture and a profitable organization. This checklist can help you determine your strengths and weaknesses in your current plan.

• Do you have clear pricing and profit models? Review your current pricing and profit models, and also ensure that your sales team understands your pricing and profit models. When they understand the why and the how of your models, they will be more engaged in exceeding their quota.
• Is your commission plan simple and transparent? Any commission plan should be easy for a sales professional to calculate the commission on their opportunities. Transparency includes clarity around why a commission plan was created in a certain way, along with the terms and conditions of the plan.
• Is your commission plan consistent? Commission plans that have consistency over time related to calculations, accelerators, and payout timing will build trust. This includes accuracy of the commission plans.
• Is your plan based on reliable growth in the market? A plan based on inflated growth percentages won’t create an environment for the right behaviors. If anything, it will deflate the sales team and can cause significant goal regression. If you’re incenting high levels of growth, consider a forecasted goal and a stretch goal. Behind the scenes, understand your organizational health at both levels to prevent organizational spending based on the stretch goal.
• Are you clear with revenue and profit guidelines? If your commission structure is based on revenue, confirm that there are protections in place to prevent selling at unprofitable levels. If your commission structure is based on profit, watch for areas where sellers don’t control profit variables (recent examples are product costs, freight increases, and labor demand) and may be unfairly penalized. Additionally, team quotas and incentives are mistake prone; they also need to be clear, simple, and easy to calculate.
• Do you focus on growth areas without de-incentivizing core areas? For organizations with diversified offerings, or trying to capitalize on an industry trend, take care not to over-focus on those areas at the expense of core offerings. You may find yourself needing to course correct and make up for erosion in your core markets.
• Do you incent solid decision making at any time of the year. Quarter-end and year-end shouldn’t be triggers to discount. That trains our customers how to treat us (waiting for that time of the year because they know they will receive a discount), and it erodes a seller’s commission check.

The real estate industry and Wells Fargo examples might be extreme examples and may never happen in your industry or organization. But your customers and partners are likely more attuned to understanding how your sales professionals are compensated and are understandably wary of potentially being connected to bad practices. Your commission structure isn’t something you can afford to ignore. A commission structure that reinforces the right behaviors and incentivizes sustainable growth is something worth investing in.

Enhance Your Sales Structure

There’s no better time than now to focus on enhancing your sales structure. I can help you and your team grow sales results through my sales training program, sales consulting, and sales assessment services. Let’s talk. Contact me to schedule time for a discovery conversation.