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Do You Have the Right Commission Plans in Place?

Here are five strategies to rethink your agency's commission plans to keep your sales force working at their best.
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do you have the right commission plans in place?

Recruiting and retaining sales representatives in this year's extremely competitive job market has been a challenge for every organization. As we draw to the end of 2022, here are some ideas to rethink your agency's commission plans to keep your sales force working at their best:

1) Set appropriate sales goals. Economic uncertainty, with the potential of high growth or significant decline, adds to the difficulty of setting realistic, achievable goals. If you've historically set goals based on previous annual sales—for instance, 2022's sales plus a certain percentage—2023 may be the year to revise that process. 

Major economic changes, such as a pandemic or a recession, account changes due to mergers & acquisitions activity, and major weather calamities, are just a few of the reasons to take a second look at your sales goals. Many organizations address market uncertainty by setting six-month or even quarterly sales goals. In organizations where sales are typically in short cycles, regular review and adjustment of sales goals can be particularly effective.

2) Review base salaries. The most common pay mixes for sales representatives are a 60% base with a 40% commission or a 50% base with a 50% commission. However, high inflation rates, rising costs of housing in many metropolitan areas, and high gas prices may mean that base salaries are no longer competitive, which is why they are going up.

In the second quarter of 2022, wages and salaries for private industry workers increased by 5.8% at a two-quarter annualized rate, up from 4.9% in the previous two quarters, according to The Conference Board

It's not uncommon for organizations to set base salaries for sales reps and then not pay much attention to them. Now is the time to review them to stay competitive as you recruit new reps and work to retain your current sales force.

3) Don't forget to pay for business development. Finding customers to grow business takes time. By definition, business development is a long-term, strategic process. In large organizations, there are often individuals or even teams who fulfill the business development role.

In smaller organizations, however, the sales rep may be responsible for business development activities. Unfortunately, that requires a time commitment that lengthens or alters the sales cycle and results in less direct influence over customer buying decisions. If that's the case in your organization, you may need to adjust your pay mix to recognize the importance of business development and the amount of time it may require. 

4) Keep it simple. Commission plans for sales positions can be incredibly complex. If you've done some research on modifying or enhancing your own plan, you've most likely encountered terms like “tiered," “ramped," “hurdled," “clawback," and more. All of these plan provisions can and do work well. Their complexity, however, requires more complicated administration and the ability of your internal systems to accurately track sales and related data.

Conversely, simple works very well, especially in smaller organizations. Two plans that are common and can be effective are the gross revenue commission model and the gross margin commission model.

In the gross revenue model, when a sales rep sells a product or service they will receive a flat percentage in commission. This model is particularly effective in organizations that seek to expand their market share or enter new markets.

The gross margin model is similar in construction. Instead of focusing on total sales, however, the focus is on profitability. Under this model, sales reps receive a flat commission percentage of the amount of a sale minus the expenses associated with that sale. For example, in an organization using a gross margin model and paying a 10% flat commission rate, a sales rep making a $10,000 sale with $4,000 of associated expenses would receive 10% of the gross margin, which is $600. 

5) Consider ditching the 100% commission model. In this competitive job market, if your pay plan is structured as a commission-only plan, expect a particularly challenging year.

Although 100% commission plans are heavily used in insurance, real estate, and other industries where one or two customer contacts yields a sale, they don't work well in industries with long sales cycles or in organizations where significant business development activities are part of the sales role.

Susan Palé is vice president for compensation at Affinity HR Group Inc. Affinity HR is the endorsed HR partner of Big “I" Hires, the Independent Insurance Agents of Virginia, Big I New York, Big I New Jersey and Big I Connecticut.

Friday, November 11, 2022
Recruiting, Hiring & Training