If I am not much mistaken I do believe us Brits invented the game of Rugby, as well as Football (soccer to some), Cricket and probably Tennis… and where are we on the world stage of these fine sports?… not at the top of our game that is for sure. So, how do we do in other sports like swimming, running, jumping, etc… with a few exceptions we are also not at the top… us Brits are not known of sporting prowess.

All for One and One for All
With us hosting the 2012 Olympics we need to raise our game or be embarrassed as hosts. It does not take a genius to recognise this and several programs are under way to find, develop and nurture the talent. However, our problem has its foundations in our schools. My kids had the awful experience of attending a school that did not recognise individual sporting effort. There was no competition… everyone went out on the field and everyone won. There was no incentive to achieve… everyone got the same reward… all for one and one for all… does not cut the mustard… where’s the incentive to compete?… where’s the incentive to work hard?… where’s the incentive to go that extra mile?… if everyone gets the same reward no matter what their effort, why should you work flat out when others don’t?

Bonus or Commission
It’s the same in business. Bonus schemes do not generate extra individual effort to achieve… those that put the effort in will have probably done it anyway without the bonus being there. It’s one of the reasons why sales guys are paid a commission rather than a bonus, because the commission scheme rewards individual effort… or does it?

Commissions are paid as an incentive for sales people to close more business… to go the extra mile to make sure business comes in and the company prospers… without business there is no prosperity… we all know this! Put a non commissioned sales guy against a commissioned sales guy and I will tell you who will bring in more business. So, we are all agreed, sales guys need to be paid commission to encourage and motivate them to go the extra mile and bring home the bacon!

Where it Starts to Go Wrong
The company does not want to pay out loads of money for no reason. They don’t want to pay commission to lazy sales reps who don’t earn it. They don’t want to make it too easy for them. They don’t want the sales rep selling something that can’t be delivered. They don’t really want to pay until the customer has paid. They don’t want to pay if there is no profit… and in response the commission plan starts to get complex and the incentive reduces in proportion to the complexity.

The Biggest Mistake
Other than the making of a complex commission plan the biggest mistake that most companies make is that they pay commission on revenue rather than order. The first problem here is that the sales guy is not in charge of delivery… that is someone else’s responsibility. If you sell some form of product that is shipped straight away then paying on revenue is not such a big problem. On the other hand, if you bag an order and revenue comes in over time then this is a big problem. A good example of this is services companies… win a big order and delivery is scheduled over months or even years and so the sales guy is paid as it gets billed and he has not control over this. How is the sales guy going to measure his sales earnings? Can he see where the money is coming from? If he can’t see it, if he can’t measure how he is doing, if he can’t project when he will hit accelerators, then the incentive is diminishing. Now he has one eye on delivery, when you already have an army of people doing this, and one eye on future sales. If you want the sales rep to perform he needs both eyes on sales.

I know a services company who pays on revenue and so much time is wasted on trying to figure out what’s being delivered the sales reps have given up trying to figure it and they now treat the commission as a bonus… i.e. the incentive has gone.

Keep It Simple
You don’t want sales guys responsible for delivery; you want them responsible for orders. Other people are responsible for converting orders into cash. If you have complex delivery then measure the sales rep on orders… either Total Contract Value or Annual Contract Value… don’t link their commission to revenue as com plan will get very complicated and a lot of effort goes into managing it. Tracking is easy and everyone knows where they are.

Go the Extra Step
Lastly, I’m constantly flabbergasted at how most companies don’t fully use the commission plan to provide the incentive for the extra push. The company will tell you how you have made to date, but don’t provide the tools to see how you could earn if certain deals come in. Sales reps need to start forecasting their commission rather than sales… but if the commission plan is too complex they can’t do this and the very reason for paying commission has gone… to provide the incentive to go the extra mile.

My daughter used to swim for a club… we had to get her doing something competitive… and I remember watching her do a time trial for her county time. It was a 400m freestyle swim and she missed her time by 1 second. She finished exhausted, she did not look like she could have done anymore. However, if she had known she was going to miss by 1 second do you think she would have found that extra time?… I’m positive she would. In fact I believe if she was 4 seconds down she could have found it if she knew early enough in the swim that was how much she was going to miss by. There are 6 turns in a 400m swim, she could make up 1 second a turn if she knew. However, knowing you are going to miss by 4 seconds on the last length would not have helped. Knowing where you are against your predicted outcome helps with that extra effort…. It’s no different for sales reps… know how you are going to finish early enough and if you are going to miss your target you will have time to do something about it… you can’t make it up on the last length!

In Summary
Putting commission plans together is not easy. Neither the company nor the sales rep wants to feel cheated. Simple plans are easier to maintain, easier to monitor and provide the greatest incentive. Pay on what’s in the sales reps control; avoid paying on what they can’t control. Have the sales rep focusing both eyes on bringing in the orders rather than one eye on orders and one eye on others who are responsible for delivering his commission.

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