How to Avoid Commission Mistakes: Common Pitfalls and Best Practices
Proper management of commission can be the dividing line between a motivated sales force and the wrecking of business objectives. Miscalculations of compensation plans and the mismanagement of these programs will lead to nothing more than displeasure, low morale, or perhaps even high turnover with the sales team. In order to prevent all this, you have to ensure that strategies and best practices are in place to govern your program toward accuracy, fairness, and alignment with your firm’s objective. Here is a summary of common commission mistakes and how to avoid them.
The Importance of Accurate Commission Management
Commission management is more than just paying your sales reps right; it’s a system that should motivate your team, drive good performance for them, and be supportive of the growth of your business. Possible dire consequences for wrong computations of commissions include high levels of attrition, reduced sales productivity, and loss of trust. Understanding common mistakes and how to avoid them will enable you to develop an effective and sustainable compensation plan.
Common Commission Mistakes: How to Avoid Them
1. Resorting to a Generalized Commission Structure That Fails to Cater to Your Business Requirements
One of the most common mistakes businesses make is creating a one-size-fits-all commission structure that doesn’t align with their specific needs. Although it is tempting to move towards a generic commission model to save time, the ideal approach often results in inefficiencies and dissatisfaction among your sales team.
- Make Your Commission Structure Personal: Take the time to build a commission plan that will address individual necessities, for your business and sales team: Industry, Sales Cycle and Team Dynamics are some of the factors you should consider while you design your commission structure.
- Review and Adjust Regularly: Periodically review your commission plan to ensure that it keeps up with the ever-changing needs of your business. In reality, you may have to actually keep making changes in your scheme as the company grows or the market conditions change.
2. Failure to Adjust Your Sales Commission Plan as the Business Grows
As your business grows and changes, so should your sales commission plan. What worked when your company was smaller might not be enough to make it happen at scale. Neglecting the updating of your commission plans could mean that you lose alignment with business goals and works against motivating your sales force.
- Performance Metrics: Keep monitoring your compensation plan to note its effectiveness; this way, one knows where some adjustments need to be made.
- Keep Competitive: Ensure that your commission plan remains competitive with that of other players in the industry. Modify commission rates and structures according to changing market conditions and alterations in sales strategies.
3. Promising Inflated Potential Earnings and Unrealistic OTE
High OTE promises, in turn, obviously will drive the best talent your way; however, if these numbers are sky-high and unreachable, disillusionment and turnover can happen quickly. Unrealistic OTEs harm trust, but the rest of the sales force is affected by the demoralization.
- Set Realistic Expectations: OTE Projections should be attainable to most Sales Reps. Base projections on realistic sales objectives and past performance.
- Clearly communicate to your sales team how these OTEs are created and what it will take to realize them: This ability makes clear communication set expectations and foster trust all around.
4. Delivering Total Compensation Rates That Are Below Market
In today’s competitive job market, providing a compensation package below industry standards is likely to result in high attrition and hampered ability to attract the best talent. Sales reps these days are equipped with all the relevant tools like PayScale and Glassdoor, which allow them to compare their earnings to industry averages.
- Benchmark your compensation rates in terms of industry standards on a continuous basis and ensure that they are competitive: This comprises the base salary as well as commission rates.
- Make adjustments quickly when you observe that your compensation package is below par to market forces: This should help you to retain your top talent and attract new faces.
5. Small Variable Pay Ratio
Marketing is another commission-driven function; in this case, too small a percentage of variable pay might defeat your compensation plan’s very purpose. If there is little incentive to top quotas, there’s little motivation for the salesperson to go above and beyond the call of duty.
- Balance the pay mix between fixed and variable pay: Ensure that your compensation package has an element of variable pay meaningfully enough to drive sales excellence. A well-constructed package will drive the behaviors that lead to success in selling.
- Add Performance Metrics: Relate variable pay to specific performance metrics, such as deal size, closing speed, or customer retention, to ensure the incentives you provide are in line with your objectives.
6. No Trace of Multiplier-Style Pay
Not including multipliers or accelerators in your commission plan can have the effect of making your salespeople fat, dumb, and happy. Without additional reasons to work against increased quotas, reps might not find the motivation to push beyond that level.
- Include Multipliers: Multipliers or accelerators can be added to scale the commission rates upward as the reps surpass their quotas. Now develop a very strong incentive for selling further even after the reps have reached the target.
- Reward Great Performance: Design a commission plan that gives your top performers higher commission rates or additional bonuses, which will make them continuously give their best.
7. Misalignment with Company Goals
A commission plan out of harmony with a company’s goals could potentially sever the connection between individual and organizational performance. This could get translated into a well-paid sales team that doesn’t drive overall business success.
- Strategic Goals Alignment: Making sure your commission plan design correlates to support the strategic objectives of your company. Such alignment may incite behavior to contribute toward long-term growth.
- Regular Review of Alignment: Review your commission plan on a regular basis so that it remains in alignment with business goals. Modify the plan accordingly to ensure the sales force continues to target the right objectives.
Best Practices in Commission Error Avoidance
1. Use Data to Commission-Plan
Design a plan that is an effective commission-based plan. Utilize historical sales data, industry benchmarks, and performance metrics in designing a commission plan built to mirror your organization’s requirements.
- Analyze Historical Data: Examine prior sales performance information to identify any trends and patterns of relevance to the design of the commission plan. Such analysis could enable you to put realistic targets and incentives in place.
- Benchmark Against Industry Standards: Compare your commission plan with industry benchmarks to make sure it is competitive and aligned with industry best practices.
2. Regularly Update Your Commission Plan
Evolution of the commission plan for the changing business: This should periodically be updated, like any other. You will keep it current; consistent with market pay practices, balanced against the business outlook, reflecting your corporate goals and objectives.
- Quarterly Reviews: Carry out quarterly reviews on the commission plan, assessing its effectiveness, and implement any changes needed. This review process positions you on the safe side of changing business needs as it is reviewed often.
- Accept Feedback: Obtain sales team feedback for this particular plan at the point of review, identifying wherever necessary that a particular aspect of the whole plan is in need of an area of improvement. Such feedback can be helpful for you to both hone the plan further and address some areas of concerns.
3. Implementation of Commission Management Software
This software provides automated calculation and real-time visibility, while also enforcing company policies; it will spare you many typical mistakes.
- Automate Calculations: Automate commission calculations through software, thus ensuring that no commission calculations have errors, and consequently zero payout mistakes.
- Provide Insights in Real Time: Choose the software that provides real-time visibility into commission earnings and performance metrics so your sales reps stay motivated and informed.
Conclusion
Commission should be properly set in order to motivate the sales force, to be fair, and to ensure the prosperity of your business. By applying strategies and best practices like commission personalization, alignment of the commission plan with the company’s goals, and data-supported decision-making, you will more easily be able to develop a plan for commissions that is in line with your sales objective and promotes a culture of performance.
