4 steps to build a sales commission plan

1. Choosing the right commission structure

The key to designing an effective sales commissions plan is to choose a commission structure that is tailored to the company's objectives and the dynamics of its sales team. Here is a brief overview of the different models available:

Simple commission

• How it works: A fixed percentage of the sales generated by the salesperson is paid as sales commissions.
• Benefits: High motivation, total control over income, profitability for the company.
• Disadvantages: High turnover, lack of financial security, competitive working environment.

Relative commission

• How it works: Commissions are calculated on the basis of fixed objectives, with a percentage proportional to the results achieved in relation to these objectives.
• Benefits: Easy to customize, adaptable to growth, predictable budgeting.
• Disadvantages: Dependence on precise quotas, limited incentive to exceed quotas.

Absolute commission

• How it works: A fixed amount is allocated for each specific action carried out, irrespective of total sales.
• Benefits: Encouragement of specific behaviors, simplicity of application.
• Disadvantages: No direct link with income targets, possible disparities between territories.

Straight-line commission

• How it works: Commissions increase proportionally with each sale made, with no cap on the total amount.
• Benefits: Incentive to exceed targets, easy customization, simple scaling.
• Disadvantages: Difficult to budget, dependent on clearly defined sales targets.

Commission per level

• How it works: Commissions increase in stages, with higher rates for sales above certain thresholds.
• Benefits: Ongoing motivation, encouragement to innovate, sustained effort.
• Disadvantages: Difficult budget forecasting, high resource requirements for payments.

Commission deduction

• How it works: Sellers receive an advance on their future commissions, guaranteeing a basic income.
• Benefits: Financial security, attractiveness to talent.
• Disadvantages: Less profitable for the company, potentially reduced motivation, administrative complexity.

Commission on territory volume

• How it works: Commissions are shared between the members of a sales team, based on the total volume of sales made in a territory.
• Benefits: Encourages collaboration, reduces individual pressure.
• Disadvantages: Feeling of injustice, limited motivation compared to individual models.

Residual commission

• How it works: A percentage of the revenue generated by recurring customers is paid to the seller, creating a continuous revenue stream.
• Benefits: Strengthened customer relationships, predictable revenue stream.
• Disadvantages: Time to generate significant income, dependence on customer loyalty.

Gross margin commission

• How it works: Commissions are calculated according to the gross margin achieved on each sale, favoring profitability over volume.
• Benefits: Focus on profitability, financial benefits for the company.
• Disadvantages: Risk of misalignment of incentives, difficulty in establishing a budget.

Multiplier commission

• How it works: A sales commission rate is applied according to performance, increasing the incentive to achieve higher results.
• Benefits: High motivation, alignment with organizational objectives, flexibility.
• Disadvantages: Complexity of management, difficulty of implementation, problems of financial predictability.

The right commission structure needs to be chosen strategically, taking into account the specifics of the business and the behaviors you want to encourage within the sales team.

‍

2. Defining tiers and bonuses

a. How do you set fair and motivating commission levels?

When designing a sales compensation plan, the definition of commission tiers is crucial to encourage sales rep performance while maintaining a climate of motivation within the team. The levels must be sufficiently ambitious to reward over-performance, but also achievable to avoid demotivating those who perform at an average level.

‍Figures to remember

74.1% of sales reps with capped commissions, according to a study by Qobra, failed to meet their targets in 2022, compared to 37% of sales reps with uncapped commissions who exceeded them. This highlights the importance of a commission system that rewards effort above and beyond expectations.

Rewarding out-performance

‍To establish motivating levels, a progressive approach is often effective. For example, by increasing the commission percentage as targets are exceeded, companies can stimulate proactive behavior. A commission model based on 'sales accelerators' could be introduced. This means that once a basic target has been reached, the commission rate increases exponentially for each additional milestone passed. 

To find out more

‍Read our article "Sales accelerators: A lever of business performance", and use a concrete example to discover the benefits of rewarding your best sales reps exceptionally.

Achievable levels

‍It is also essential that these levels are realistic. The right balance needs to be struck to ensure that even intermediate performance is recognized and rewarded, thus avoiding a feeling of discouragement. For example, a SaaS company with an annual quota of €360,000 could establish several tiers: 100% (€360,000), 120% (€432,000), and 150% (€540,000) with increasing commission rates.

b. Propose additional bonuses for specific behaviors and objectives

In addition to commission tiers, additional bonuses for specific behaviors can also increase sales rep commitment. For example, bonuses can be offered for initiatives such as cross-selling, loyalty or new customer acquisition. This helps to create a performance culture where every positive action is recognized.

To guarantee the effectiveness of these bonuses, it is essential to link them to measurable indicators and clear objectives. For example, a company could offer a 5% bonus for each additional contract signed, or reward sales reps who achieve a customer retention rate of over 80%.

In short, defining fair and motivating commission levels, while incorporating bonuses for specific behaviors, is a winning strategy for maximizing sales rep performance and ensuring employee satisfaction. This model encourages not only the achievement of objectives, but also the creation of a collaborative and committed work dynamic.

‍

3. Include control and correction mechanisms

For a sales commission plan to be effective and sustainable, it is essential to incorporate control and correction mechanisms. This ensures that the system remains relevant and motivating, even in the face of unforeseen circumstances.

a. Managing the unexpected

Economic fluctuations, market changes or unforeseen crises can upset the initial objectives of a compensation plan. For example, during the COVID-19 pandemic, many companies had to revise their sales targets, often with very tight deadlines.

To manage these unforeseen events, it is advisable to adopt a real-time evaluation system. This can take the form of performance monitoring tools (individual and collective) such as Qobra, which can be used to rapidly analyze the results of sales reps.

By integrating key performance indicators (KPIs) adapted to changing contexts, companies can quickly adjust targets and commission levels. For example, a sales target that proves unrealistic in times of crisis can be adjusted, ensuring that sales reps don't feel demotivated by unreachable targets.

b. Setting up periodic reviews

Another crucial aspect of maintaining the effectiveness of the sales commissions plan is the establishment of periodic review systems. In general, these reviews are recommended on an annual or quarterly basis, depending on how quickly the sales rep environment changes.

Practical tips

1. Regular evaluation of KPIs: Set up quarterly sessions to review the KPIs linked to sales reps. This enables emerging trends to be detected, and the plan adjusted accordingly.
2. Team feedback: Implement regular questionnaires or interviews to gather feedback from sales reps. This helps to understand the challenges they face and to adjust levels or bonuses to meet their needs.
3. Pre-established crisis scenarios: Develop crisis scenarios in advance and associated action plans. For example, if a market contracts, define in advance how to adjust sales targets and the corresponding incentives.
4. Data analysis : Use analytical tools to monitor performance against targets in real time. This data enables rapid, informed decision-making.
5. Transparency of adjustments: When changes are necessary, clearly communicate the reasons for these adjustments to the sales reps. This builds trust and commitment, even in times of change.

Incorporating control and correction mechanisms into a sales commission plan is essential for its longevity and effectiveness. By anticipating unforeseen circumstances and introducing regular reviews, companies can ensure that their remuneration systems remain fair, motivating and aligned with their strategic objectives. Ultimately, a well-designed plan contributes not only to the performance of sales reps, but also to the satisfaction and retention of talent.

‍

‍4. Testing the viability of the sales commission plan

‍To ensure the success of your new sales commissions plan, it is essential to carry out financial simulations. This step is crucial to assess the impact of the different performance scenarios on the company's budget and to guarantee the profitability of the plan, while avoiding unforeseen overruns.

a. Carry out financial simulations

Impact of different performance scenarios on the company's budget

‍The simulation of performance scenarios needs to take into account a number of sales commissions, including the success rate of sales reps and the effect of sales accelerators. For example, if you are considering a plan where top performers can earn up to 150% of their sales commissions, it is essential to assess how this increase will affect the overall budget. This means that if your business is delivering exceptional performance, you need to plan for a proportionate increase in your budget.

Simulation of the profitability of the new plan

‍To avoid surprises during implementation, it is essential to simulate the profitability of the new plan. This simulation should include customer acquisition cost (CAC) and return on investment (ROI) analyzes. For example, if a CAC is estimated at €10,000 and the customer lifetime value (LTV) is €30,000, then your plan should demonstrate that even with high premiums, the LTV/CAC should remain attractive. Ideally, a LTV/CAC ratio of at least 3:1 is often recommended to guarantee profitability.

b. Gathering feedback from sales reps and managers

Once the financial simulations have been carried out, it is crucial to gather the opinions of sales reps and managers before the final implementation of the plan. This ensures that the plan is both motivating and achievable.

Involving sales reps in the process

‍Feedback from sales reps can provide valuable information about what works and what doesn't in the proposed plan. By gathering opinions on the new plan, you can identify elements that might be perceived as unfair or inappropriate. Organize feedback sessions, focus groups or individual interviews to obtain constructive comments.

Consult managers for strategic alignment

‍Managers play a key role in the implementation and success of the remuneration plan. Their day-to-day experience with sales teams can provide essential insights into the viability of the plan. By involving them in the evaluation process, you ensure strategic alignment. They can suggest adjustments based on team dynamics and market expectations. What's more, managers can be invaluable allies in communicating the new plan. Their understanding of the details and impact of the plan will help to reassure sales reps and encourage positive adoption.

In conclusion, testing the viability of the sales commission plan through financial simulations and consultations with sales reps and managers is an essential step. This will not only ensure that the plan is financially sustainable, but also that it is well accepted and motivates all the sales reps. By proceeding in this way, you increase the chances of success and sustainability of your sales commission strategy.