Why make commission plans so complicated?

Every commission plan has two modelling spreadsheets. The first one is built by the commission team to make sure the numbers work as intended. The second one is by the sales people working out how they can break it, that is, maximize the outcome for themselves. No guesses on who usually wins, not only because of the greater motivation of sales people to maximize earnings, but also because there are far more of them to do the analysis.  

Over time commission plans have become more and more complicated. The main driver of this is that they are being used as a management tool instead of what they should be, a commission plan. Instead of sales managers providing direct one to one guidance, support and coaching for both poor and high performers the commission plan is constructed to provide the performance feedback. The idea is high performers earn more and therefore will stay while the poor performers earn less and leave.

A typical commission plan starts with the annual presentation to the sales team. This is followed by the start of year quota negotiation, although this is usually more “telling” than “negotiating”. Most commission structures are based around a lower commission rates when we are below target and accelerators when we are above target, but not too much extra for overachievement. Then all the rules are added; there can be quarterly skew targets based on revenue history, bluebird and blackbird rules, pre-payment and claw back. There can be SPIFs (sales performance incentive funds), MBOs, KPIs, product focus multipliers, an overall company performance bonus and a customer satisfaction bonus.

An example of the trend towards complicated commission plans is the fact that a Vice President of Oracle posted the following picture on Linkedin.

The commission plan should be in the background and not a regular topic in sales meetings. The sales people should believe that, if they do a good job they will be justly rewarded by their organization. If they are overly focused on the commission plan it usually means that there are other issues within the organization. Issues like being able to deliver the outcomes customers want, team work across the functional groups, too much administration work, lack of continuous improvement of products, processes and innovation.

The statement, “one size, never fits all”, is never so true as when referred to global commission plans. Trying to develop a commission plan that applies to every country, culture, market, product and service in the world is impossible. What works in one country can be a cultural insult in another. Yet global companies keep on trying. Not even Excel has enough functions to make this work and rumor has it that 50% of Excel functions have never been used!

Frederick Herzberg’s research showed that commissions for sales people is a “satisfier” and not a “motivator”. We are satisfied if we are paid what we believe we deserve. Money is an extrinsic reward. Conversely, we are very dissatisfied if we are not paid what we believe we deserve. But contrary to common belief sales people are not motivated by money. Motivation is driven by our intrinsic values. We are motivated by, valuing our organization’s mission, doing a good job, delivering solutions for our customers and working as a team.

Keep the commission plan as simple as possible. Rely on management to handle the exceptions as well as the poor and high performers. The exceptions will include unforeseen circumstances in the markets, with competitors, customers, products and economies. Manage them as exceptions and don’t try to predict all the variables in the world.