Balance Motivation, Simplicity, and Longevity in Commission Plans

Designing a commission plan for a sales team requires a balance between motivating desired behaviors and outcomes, ensuring simplicity for calculating earnings, and promoting decisions that result in value-based and long-term business relationships.

Here are some pointers for entrepreneurs creating commission plans for strategic sales, meaning big ticket, high value, and long term relationships.

Understanding the Business Context

For purposes of this post, the Strategic vs Transactional Startup is distinguished mostly around price vs value, level of effort, and sales cycle times.

Transactional Startups would include the "one-call-close" business. It's historically a price decision. That's not the kind of company this post is about.

In this post, the Strategic Startup is a company solving the sort of problems that senior level prospects like EVPs, VPs, and C-level types see as strategic to their business. The decisions are often made collaboratively, and for the sake of context to this post, let's assume the sales cycles are 3 months or longer.

This isn't a comprehensive distinction or context, but it's how we'll frame what's to come.

All that said, it's essential to put whatever plan you develop into perspective relative to your business context. As a Strategic Startup, your short- and long-term growth will rely heavily on establishing strong, lasting, and trusting relationships with your customers. Unlike short-term transactional sales, a business model that thrives on long-term contracts that provide consistent revenue streams and foster deep trust with clients must incentivize salespeople to secure long-term contracts and build enduring client relationships.

Simplifying the Commission Structure

Just because you're selling a strategic solution doesn't mean your commission plan needs to be complex. Especially in the critical early years of your startup, look to design it with simplicity as a paramount consideration.

Your salespeople should be able to easily understand how their commissions are calculated and when they will receive them. Overly complex plans with numerous variables will lead to confusion and frustration which I can assure you puts a drag on motivation and maybe most importantly, trust in you as a leader.

Here's a simple example.

Start with a straightforward commission on a sale. Let's use 10% on the total contract value for any new business resulting in a contract of three years or more. This simple percentage allows sales reps to quickly calculate their potential earnings and focus on closing deals without getting bogged down by intricate formulas or fine print.

Use Tiered Bonuses for Higher Performance

While simplicity is crucial, you also want to create a plan that recognizes and rewards high performance. A good way to achieve this is with a tiered commission bonus structure.

This additional incentive will motivate sales reps to aim higher and close larger deals by offering additional rewards for surpassing certain sales thresholds.

Here's an example for a bonus paid to reps who have a quota of $500,000.00:

• An additional 2% commission on all sales when the total sales exceeds $500,000.00
• An additional 3% commission on all sales when the total sales exceed $1,000,000.00

This approach strikes a balance between simplicity and motivation. The tiers are easy to understand, yet they provide substantial rewards for sales reps who exceed expectations and contribute significantly to the company's growth.

Structuring the Payment Schedule

A critical aspect of any commission plan is the payment schedule. Sales reps need to know when they will receive their commissions to manage their finances effectively. However, it's also important to align the payment schedule with the company's cash flow and ensure that commissions are paid out in a manner that reflects the client's commitment.

One way to strike this balance is as follows:

• 50% of the total commission due is paid when the contract is signed
• The remaining 50% is paid after the customer makes their first payment, provided that payment is not too far out in the future

Timing is really important. Gratification delayed is gratification lost. The faster you put money into the pockets of sales people, the more motivated they get and stay to make more sales.

I get it. You're a startup. Cash is king. (It will be for a long time.) You can't pay reps commission dollars you don't have, so it'll be extremely critical that your first sales hires understand this reality.

A modification to the above, depending on how you do accounts receivables, could be 50% commission on first customer payment and the balance at some reasonable point in the future.

Just take it from me. If your reps have to wait too long to get paid, they probably won't be around for long.

Examples for Clarity

Make sure to include clear and realistic examples in the commission plan document. Examples help sales reps see exactly how their commissions will be calculated in different scenarios, removing any ambiguity and reinforcing the plan's fairness.

Summary

In summary, a good commission plan gets crafted with several key considerations in mind:

• Motivating desired behaviors and actions by your salespeople
• A reasonable, simple, and transparent calculation and payment schedule
• Rewards that increase with exceptional performance

Need help crafting a commission plan for your organization? I can help.