Posted by: Mike Clarke
Commission structures are normally designed to encourage your team to deliver desirable results yet done incorrectly they can produce more problems than they solve. Designing your commission structure is not just a copy and paste exercise, it is important to put proper thought into designing it and then communicating it to your team if you’re to encourage the behaviour you’re looking for.
In this article, we’ll highlight some common pitfalls when designing commission structures and share solutions you may want to consider to help you get a better understanding of how the right incentive structure can drive your team’s results.
The objective of a commission structure is to motivate your team to work towards positive outcomes for your business. However, if your targets are perceived as unobtainable this will quickly become a negative in the eyes of your staff. If you have staff with a low basic salary that’s theoretically compensated for through your bonus scheme then achieving sales targets is no longer a benefit but instead it becomes a requirement. If this is the case then making your sales targets realistic becomes doubly important.
Setting targets too high will encourage your staff to pursue bad deals purely to earn their commission. Whether these are caught and cancelled by your quality team or allowed to go through then cancelled as a result of a complaint, this is a guaranteed method to spread a lack of motivation throughout your business.
While it can be tempting to see a certain amount of commission as “enough”, setting a cap for the amount of commission an agent can earn in a month rarely drives the sort of behaviour you’re looking for. Once an agent hits their commission cap it’s unlikely they’ll be motivated to make any more sales in that month and the motivational aspect for the rest of your team of your top-hitters getting sales will evaporate until the beginning of the next commission cycle.
If you genuinely feel that you have agents earning “too much” then this is probably an indication that there’s a weakness in the commission structure or possibly that some agents have found a way to game the system. Either way, a commission cap is a blunt tool and is generally best avoided.
Sales Agents are Coin Operated
Commission structures are by far the best way to drive behaviour on a sales floor, and you can use this to drive much more than just the number of sales being attained. If your business model allows for upselling of other products and services, then adding a bonus or target for number of customers upsold will drive more of this behaviour. If cancellations are a problem, then make sure this is accounted for in your commission calculations. If agents are burning through too many leads, then add a target leads-to-sales ratio as part of the structure.
Adding tactical bonuses or targets for the types of behaviour that you need your sales agents to exhibit can make a profound difference to your operations and success.
Unintelligible Commission Structures
The danger with overthinking your commission structure is that it becomes so “sophisticated” that it becomes impossible for agents to understand. If agents don’t understand how their wages are being calculated this creates two major problems. Firstly, they’ll either not respond to the incentives you’re putting in place or they’ll put too high priority on secondary behaviours and take the focus off getting new business. Secondly, come pay day, you’ll have a queue of agents at your door complaining that their pay is wrong and wanting to see evidence for every item that is (and isn’t) accounted for.
Whenever you onboard new agents or make updates to your existing commission structure, you need to make sure that everyone understands exactly what is expected of them and how this will be reflected in their pay. If agents are still getting confused, then this is probably an indication that it’s time to go back to the drawing board and come up with something that’s easier to understand.
If you have a queue of agents at your door every pay day, chances are your commission structure lacks transparency
Dividing the Team
Sales teams thrive when they work together and support each other but only up to a point. Commission structures that are based on teams hitting their targets can quickly create resentment within the team toward members who are struggling to contribute toward hitting the team target. This can be especially problematic with new starts who are still learning the ropes, or with agents going through personal issues. Unless the sales effort is genuinely a team effort with multiple agents involved in each sale, its generally best to stick to individual targets and commission and use team targets for special events and incentives.
It's also not unheard of for staff to try and “steal” deals from colleagues, usually done by picking up callbacks to interested customers that just require closing and taking the commission for themselves. Of course, there are circumstances where this may be justifiable, but having solid rules in place about what happens when two agents are involved in a sale will save a lot of aggravation later.
Uniting the Team (but in a bad way)
The opposite of the problem of staff stealing each other’s sales is staff “giving” sales to each other. While this might seem like a harmless bit of team bonding it can hide staff who are struggling and prevent you from getting them the training they need. It can also cost the business extra in commission handed out to agents who didn’t achieve their target themselves. To avoid this, make your company’s policy on this type of behaviour clear during training, repeat it when updating your commission structure, and ensure that your policy is consistently applied.
Lack of Transparency
For an incentive to be an incentive, staff need to be able to understand which actions drive what rewards. If your commission structure is complex and they struggle to assign value to their actions, then it becomes difficult to see it as an incentive. To avoid this, make sure that targets are clear, that agents can see their progress toward their targets using dashboards or wallboards, and agents can easily see what they’re on target to earn. Agents should also be given access to a commission statement when they’re paid detailing which deals contributed toward their commission calculation. You should be careful what’s included on such statements and avoid printing them out or you might find yourself on the wrong side of data protection laws.
Is Commission a Bonus, or a Requirement?
When designing a commission structure, you need to start by thinking about how it relates to your staff member’s basic pay and how this will affect recruitment. If your basic salary on offer is simply minimum wage, then you’re sending a clear message that staff are expected to achieve commission and that it’s not just a bonus scheme. This will also mean you might find your company struggling to attract more seasoned applicants and this will have a direct effect on your company’s culture.
A higher basic wage on the other hand will likely attract more mature and experienced applicants but you may find yourself dealing with more HR issues related to underperformance if staff can get by financially without earning commission.
There’s a fine balance here. If your basic salary is too high, then the incentive created by your commission scheme will be less effective. On the other hand, if your staff are relying on achieving commission to pay their bills then you’ll see a reduction in quality and a higher volume of complaints and cancellations driven by agents desperate to hit commission just to make ends meet. You can always let go of staff that aren’t hitting their targets of course, but this will eventually take its toll on morale and you may find yourself losing good staff as a result.
Ultimately you can have the best of both worlds if your recruitment and training processes are solid. If the staff you’re hiring are talented and well-motivated and given the training they need, then you can afford to offer a higher basic salary without the risk of high attrition due to staff not achieving targets. Removing the fear element from your staff allows them to focus on the positive aspects of achieving or exceeding targets. Rather than hitting their targets being required just to pay for essential living costs, it can be working towards something like a holiday instead. This positive spin will have a direct impact on the staff morale and driving positive outcomes more consistently over time.
Setting Targets for Success
When it comes to commission structures one size does not fit all and the above guidance should be used in conjunction with an analysis of your business objectives and the existing culture and expectations within your business.
Whatever commission structure you design it is important that it is clearly communicated to your team if you are to get the best results from it. In any target driven environment, commission and bonuses are always going to be an essential tool in driving behaviour, and a little extra thought toward how this is done will always make a huge difference.