Of all the major reward elements in use in company’s today, sales commission schemes are often the most dynamic, being tightly linked and responsive to organisational strategic change. The inherent ease of measurement of performance compared to that in other roles means that they are a very compelling reward program and satisfaction with sales commissions typically tracks at substantially higher levels than that with other reward programs.
Whereas base pay salary structures may persist for 5, 10 and even 20 years with minimal change except for a general escalation each year – with bonus programs are generally revamped every 2–5 years – the majority of sales commission schemes are closely reviewed and changed every 12–24 months.
Here are 5 key trends we have observed working with sales leaders to improve salesforce effectiveness, backed up by data from our market leading salary surveys and policy and practice report.
Fixed salary movements for sales roles, in a slow economic growth environment, are increasing at a slightly lower rate than most other professions. In times when salary budgets are tight salespeople have the opportunity to increase their earnings through the commission plan and as a result employers tend to be able to be slightly more conservative with fixed pay increases for this group. Salespeople on the other hand like to see their guaranteed pay rise during uncertain times, but for the moment, employers are able to prosecute their case more effectively.
Target based commission plans continue to be the most common approach to plan design in corporate Australia. Despite the simplicity of paying people a straight rate-based commission, this type of plan is generally not effective in driving company performance once a company moves beyond its initial growth phase. We observe many more plans being moved from rate based to target based than the reverse.
The typical plan pays out 50% of target commission at 85% achievement of performance targets, 100% at 100% and 140% at 120%. There is wide variation by role and industry though. In some sectors accelerators can be as high as 10:1, and first dollar commission plans are still very common in a range of industries.
Revenue continues to be the most common plan measure, being the primary driver of commission in 70% of companies. 40% of companies incorporate a profit/margin measure in the plan. Only 20% of companies measure sales activity (such as number of appointments or CRM compliance) for the purposes of commission payments. Only 15% of companies incorporate a company performance measurement in sales rep plans, although this rises to 31% for sales management. This is as it should be; in our experience commission plans are generally not effective when tied to inputs rather than outputs (that’s the job of management), and tying the plan to broader company measures rarely has the intended result.
Industries which are seeing the most fundamental and wide reaching changes to plan design are:
- Technology: The migration of many services to an on-demand business model changes the fundamental economics of the business; going from the sale of a license or product to an ongoing subscription, with or without a committed term affects what you pay commission on and when. Given this change is still playing out and consists of both “cloud natives” and “cloud migrants”, a variety of business models have emerged. It is critical the new plan aligns with the specific business model pursued rather than just copying others.
- Retail: Adapting to consumer preference for an omni-channel retail experience is quite simply breaking the commission plans operated in many stores and call centres and leading to innovative new approaches to performance measurement and role design which must flow quickly through to commission plan design – if a commission model is retain at all.
- Financial services: Wide reaching regulatory change impacting the sales of financial products have led to re-tooled commission plans which increase the focus on balanced performance measures including customer outcomes, compliance and personal development in addition to sales volume. One global bank removed volume based incentives entirely for their frontline retail staff, replacing them with customer satisfaction and sales quality measures. New financial products being developed by technology native startups are also increasingly cutting the traditional salesforce out of the distribution model entirely. They are being replaced by the App Store and a website.
- Consumer products: Australian suppliers of fast moving consumer goods face the most concentrated retail distribution market in the OECD and as a result traditional territory and key account management approaches often do not prove as effective as they do in other countries. Plans that focus on shared value creation and full supply chain integration are a better strategic fit in this environment than the more adversarial buyer/seller/price maximisation plans still in operation in many firms. Efficient territory management and planning also takes on critical importance.
Get in touch for more information on how you can fine tune your sales commission plan to best suit your needs in the changing economy.