Sales commissions are crucial to a company's success. A well-designed commission structure can motivate sales teams and drive performance, while a poorly designed one can lead to negative consequences. Creating the ideal commission structure can be challenging, but it doesn't have to be overly complicated.
In this article, we’ll dive into the most common mistakes companies make when setting up their sales commission structures and, more importantly, how to avoid them.
Why Getting Sales Commissions Right is Crucial
A sales commission is more than just a paycheck boost for your sales team. It’s a powerful motivator that directly impacts your company’s success. A well-designed commission plan should do three things:
- Motivate salespeople to hit and exceed their targets.
- Align with your company’s overall goals.
- Be fair, transparent, and easy to understand.
Let’s look at some of the most common mistakes businesses make and how you can sidestep them.
Mistake 1: Setting Unrealistic Quotas
The Problem with Sky-High Targets
Setting unattainable sales targets kills motivation. When reps feel like no amount of effort will meet their quotas, it leads to stress, burnout, and turnover.
How to Fix It
Quotas should stretch your team but not break them. To strike the right balance, do the following:
- Analyze historical data, market conditions, and individual sales rep capacity.
- Implement tiered targets to keep quotas realistic, challenging, and achievable.
- Set a baseline quota and offer extra incentives for exceeding it.
This way, reps stay motivated without feeling like they’re climbing an impossible mountain. Sales commission software can greatly help you achieve these.
Mistake 2: Overcomplicating the Commission Structure
Simplicity is Key
Complex commission structures with multiple layers of bonuses and percentages can confuse salespeople. If reps can't easily calculate their earnings, they may lose focus on selling.
Keep It Simple
A good commission structure should be easy to explain in one sentence and can be any one of the following types:
- Flat-rate: Simple but may not motivate higher-value sales.
- Tiered: Rewards higher sales but can be complex.
- Percentage-based: Straightforward but may not motivate for additional services.
If you feel the need to add more complexity, always ask yourself, “Is this helping or hurting?” Less is often more when it comes to keeping your salespeople engaged and motivated.
Mistake 3: Not Aligning Commissions with Company Goals
Short-Term Gains, Long-Term Pains
When commissions don’t align with your company’s broader goals, your sales team might focus on the wrong things, such as the following:
- Focus on New Customers Over Retention: Overemphasizing new customer acquisition can lead to neglect of existing clients, causing higher customer churn and decreased long-term revenue.
- Overemphasis on Sales Volume: If commissions prioritize sales volume, reps may push low-margin products, leading to short-term gains but hurting long-term profitability.
- Quantity Over Quality: Rewarding deal volume may push reps to rush sales, leading to poor customer fit and dissatisfaction, harming the brand’s reputation.
- Neglecting Strategic Products: Without incentives for a high profit margin or strategic products, reps may prioritize easier sales, stalling business growth and innovation.
- Focusing on Short-Term Sales: Tying commissions only to immediate sales discourages relationship-building and understanding customer needs, which are essential for long-term success.
Short-term gains can hurt your bottom line in the long run if sales aren’t contributing to profitability.
Aligning Sales with Strategy
The solution is to create a commission structure that encourages behaviors aligned with your company’s goals. Here are some approaches for effective compensation plans you can try:
- Tiered Commission Structures: Create a system where reps earn higher commission rates as they hit specific milestones. This keeps them motivated to go beyond their targets, driving both their success and revenue growth for the company.
- Gross Margin Commissions: Instead of focusing solely on sales volume, reward reps for the profitability of their deals. This encourages them to prioritize higher-margin products that increase profitability.
- Bonuses for Customer Retention: Incentivize reps to nurture long-term relationships by offering bonuses for repeat business, ensuring that customer retention becomes as important as new sales and helping stabilize revenue.
- Accelerator Programs: Introduce programs that boost commission rates once reps exceed their quotas, motivating them to keep pushing even after they’ve hit their targets.
- Balance Base Salary with Commission: Design effective compensation plans that offer a stable base salary along with performance-based commissions. This gives reps the security to focus on more complex, long-term deals without losing the drive to meet targets.
- Regularly Reviews: Continuously review how your commission structure aligns with company goals and market conditions, making tweaks as needed to keep reps motivated and your strategy on track.
Mistake 4: Ignoring the Impact of Non-Sales Activities
Salespeople do much more than close deals—they build relationships, train, and solve problems. Ignoring these non-sales activities can lead to an unfair system.
Try the following techniques:
- Acknowledge Diverse Roles: Recognize that salespeople do more than just close deals—they build relationships, solve problems, and train, all of which contribute to long-term success.
- Include Non-Sales Activities in Compensation: Reward reps with performance bonuses for achieving customer satisfaction, mentoring teammates, or completing professional development.
- Reward Cross-Team Collaboration: Offer powerful incentives for sales reps who collaborate with marketing, support, and product teams, encouraging teamwork that boosts overall performance.
- Set Customer Engagement Goals: Establish targets for activities like follow-up calls or check-ins, and reward reps for exceeding them to emphasize relationship-building.
- Recognize Long-Term Value: Reward upselling and cross-selling to existing customers, shifting focus from just closing new deals to nurturing ongoing relationships.
- Encourage Peer Recognition: Promote teamwork by allowing reps to nominate peers for their contributions in non-sales areas, boosting morale and collaboration.
- Provide Continuous Feedback and Development: Regularly assess both sales and non-sales performance, offering feedback and training to help reps grow in all areas of their roles.
Mistake 5: Failing to Consider Team Dynamics
Avoiding Internal Rivalries
Commission plans that focus solely on individual performance can sometimes foster unhealthy competition, which hurts team dynamics. Sales teams are most effective when they work together, sharing leads, insights, and strategies. If your commission structure pits reps against one another, it can lead to resentment and hurt morale.
Create a Balance Between Team and Individual Success
One way to foster a sense of camaraderie while still rewarding individual effort is to introduce team-based incentives. Consider incorporating a percentage of team performance into individual commissions or offering team-wide bonuses when collective goals are achieved. This ensures everyone has a vested interest in helping each other succeed.
Mistake 6: Not Accounting for Variable Sales Cycles
Sales Aren’t Always Predictable
Many industries experience fluctuating sales cycles—think retail around the holidays or real estate during certain seasons. Rigid commission structures can demotivate reps during slow periods and lead to overpayment during peak times.
Build in Flexibility
Adjust targets based on seasonal sales volumes, or offer different incentives during off-peak times to keep your team motivated year-round.
Mistake 7: Failing to Review and Adjust the Commission Structure Regularly
The Danger of “Set It and Forget It”
Sales commission structures shouldn’t be static. Markets, products, and business needs change over time. If you’re not regularly reviewing your plan, it may become outdated.
Regular Reviews Keep Things Fresh
Make it a habit to review your commission structure at least annually. During the review, ask yourself:
- Are we rewarding the right behaviors?
- Does the commission plan align with our current financial goals?
- Are there any emerging market trends that should be factored in?
Mistake 8: Offering Commissions on Low-Margin Products
Profit Over Volume
Offering commissions on low-margin products can backfire, encouraging reps to push volume over value. This hurts long-term profitability.
Reward High-Value Sales
Adjust your structure to offer higher incentives for selling high-margin or strategic products, ensuring reps prioritize deals that benefit your company.
Mistake 9: Neglecting Non-Monetary Incentives
Money Isn’t Everything
While financial incentives are important, non-monetary motivators also play a key role in keeping sales teams engaged.
Recognizing Other Forms of Achievement
Consider implementing non-monetary rewards alongside your commission plan such as:
- Recognition programs
- Professional growth opportunities
- Extra vacation days
Toward Implementing Successful Sales Commission Structures
A successful sales commission plan requires thoughtful design, regular adjustments, and alignment with both business goals and your sales team’s motivations. Get some good sales commission software to keep your structure fair, clear, and flexible, and your commission plan will inspire your sales team to excel!
