Sales commission: The guide

"Whether you're a CEO or Sales Director, the sales compensation plan is probably the most powerful tool you have to drive sales strategy."  

‍Mark Roberge, VP Sales at Hubspot.  

As Mark Roberge puts it very well, the construction of the sales compensation policy is a real strategic issue. 

Indeed, designing or reviewing compensation plans is not only a powerful motivational lever for sales reps, but it is also a source of competitiveness for the company. According to a study conducted by Primeum, comment-remunerer.com and MeteoJob, 87% of managers believe that introducing variable pay is useful.

But where to start? What steps should you take? What elements of variable pay should be included? How should fixed and variable pay be divided?

Qobra is an expert on the topic and gives you all the keys you need to develop an attractive and effective compensation plan policy!

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1. What are the benefits of a successful commission plan policy?

Among the many benefits of having a successful commission policy, the following are the main ones:

• Major motivator for the sales force
• Talent retention tool
• Reduction of staff turnover 
• Attractiveness to the best candidates
• Improvement of the employer branding

"There's no mystery about it, a good variable pay plan drastically impacts retention, motivation and performance."

Vladimir Ionesco, Director of Global Sales Performance at Doctolib

These benefits are easy to see for anyone wishing to implement or review the remuneration policy for the sales team. However, the question of which remuneration elements should be included often remains a complex challenge...

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2. Commercial remuneration policy: the basics 

Initially, although different, the remuneration policy for sales teams should follow similar rules as for the rest of the company. 

Among the basic remuneration elements that can be found in a global salary policy, here are the main ones:

• Benefits in kind (computer/desktop equipment, lunch vouchers, gift vouchers, etc.)
• Employee share ownership
• Stock options
• The company savings plan: profit-sharing and participation 
• The collective retirement savings plan

However, these elements are not enough for the company to enjoy the benefits mentioned above, such as retention, attractiveness, motivation, etc. Indeed, sales force remuneration is a special case and has its own objectives.

Today, one of the first points of attention for salespeople is variable pay, in other words, commissions or bonuses. Determined according to their individual performance, it represents an important or even majority part of their overall remuneration.

"The first motivation lever for Sales Reps comes from the bonus. They are sportsmen at heart and this notion of reward versus effort versus merit is absolutely key."

Vladimir Ionesco, Director of Global Sales Performance at Doctolib

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3. 5 essential rules to determine a Sales compensation plan

Before embarking operationally on the implementation or review of the variable pay plan, it is essential to find answers to the following questions:

• What are the company's business objectives? 
• What is the budget allocated to the remuneration of sales teams?
• What are the sa;es remuneration practices in companies in your sector? 
• What is the cost of living in your city?

"There is no magic formula for building a good variable pay plan. Instead, there are key principles to keep in mind, and the first is alignment with the business strategy."

Aude Cadiot, Revenue Operations Lead at Spendesk

The answers to these questions are therefore essential for shaping a variable pay plan. In particular, they will help to set a framework for its design.

Before going any further and getting to the heart of the matter, here are 5 essential rules to keep in mind when drawing up a variable pay plan:

• Simplicity. The variable pay system for salespeople must be simple to explain. A complex plan will be misunderstood by managers, and therefore misunderstood by salespeople. In the end, salespeople do not achieve their objectives, they do not receive their variable pay, which has a strong impact on motivation and loyalty.
• Linked to objectives. Variable pay should be directly linked to the company's strategic objectives. For example, a company that wants to expand in the United States should design the objectives of its sales staff accordingly.
• Short payment cycle. To avoid frustration among sales teams, it is important to compress the time between the signing of a contract and the payment of the related variable remuneration to a minimum.
• Fairness and transparency. The company's variable pay plan should be fair to all employees. This does not mean that it should be the same for everyone, but that it should be transparent and differences should be explained.
• Easy to implement. According to a study from Primeum, comment-remunerer.com and MeteoJob, 55% of companies surveyed believe that their variable pay schemes are not well formalized and detailed. The rules governing the variable pay plan must be clear, simple and transparent for all departments that are closely or remotely involved (finance, HR, etc.). This facilitates its implementation, measurement and execution.

As we will see below, commissions can vary between different populations and positions in the company. However, the rules we have just mentioned are valid and applicable to all.

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4. Adapting the commission policy to each population

For a variable remuneration policy to be effective, it is essential that it is adapted to its beneficiaries, and in particular to their objectives. Indeed, each sales team is composed of different teams, each of which has specific qualitative and quantitative objectives. It is therefore logical that their remuneration is structured differently.

In general terms, here are the different positions that can be found in a sales team, and their associated objectives:

• Account Executives (AE). Their job is to sign new clients and/or contracts. Their variable remuneration must therefore be linked to the revenue they generate.  
• Sales Development Representatives (SDR). The SDR's job is to generate qualified meetings for the Account Executive. Their variable remuneration therefore depends on the number of qualified meetings made and/or the income generated in a second phase by these meetings
• Marketing Development Representatives (MDR). Unlike SDRs, MDRs do not generate meetings  directly, but process those resulting from indirect meeting settings (website, telephone, email, etc.). Although these meetings are partly generated by the marketing strategy, the MDRs have no control over the volume of these requests or their quality. Their variable remuneration can be defined according to the volume of incoming requests and/or, in a second phase, the potential revenue generated by these meetings.
• Customer Success Managers (CSM). As their name suggests, CSMs are responsible for building customer loyalty. Their variable remuneration depends mainly on their ability to renew a contract, but also to sell additional products and/or services.

Tailoring the variable pay plan to each team in the sales department therefore makes it possible to meet all strategic objectives. It is a way of rewarding each employee according to his or her performance, while maintaining equity between teams.

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5. What is the ideal split between fixed and variable pay?

Although there is no single answer because the "risk-reward balance" is specific to each company's objectives, there are a few rules to follow to determine the ideal split between fixed and variable pay.

Firstly, it is strongly discouraged to go to extremes, either in terms of fixed or variable pay. In concrete terms, this means that it is unwise to spend 10% or less on fixed or variable pay. 

Indeed, in the case of a variable remuneration that is too high, the majority of candidates refuse to join the company because it leads to too much pressure and instability. Moreover, it is difficult for them to project themselves on the feasibility of their objectives.

Conversely, a variable remuneration that is too low will lead to a loss of motivation on the part of the sales teams and therefore to high turnover. 

To avoid negatively impacting the levers of attractiveness, motivation and retention, here are a few examples of the distribution between fixed and variable remuneration according to the different professions in a sales team:

• Account Executives (AE) and Sales Executives: 25-60% fixed and 40-75% variable. As explained above, the core business of sales people is to sign new customers and/or contracts, which explains the high proportion of variable pay. 
• Sales Development Representative (SDR): 70% to 80% fixed and 20% to 30% variable.
• Customer Success Management (CSM) and Marketing Development Representative (MDR): 80-90% fixed and 10-20% variable.

It is important to note that the above variable shares are also to be adapted according to the following variables:

• The stage of maturity of the market. In the case of a highly competitive market with a high sales volume, the company can position the variable remuneration in the high bracket because there is a high potential. 
• The stage of maturity of the company. A fast-growing company may also set the variable compensation at a high level in order to motivate its sales teams.
• The seniority of the employee. In general, junior employees are motivated by a high commission percentage. Conversely, senior employees prefer to have a larger fixed portion because of their family and financial situation (mortgage, etc.). However, some experienced employees prefer a higher variable part of their remuneration because they have knowledge of the business and/or the market and/or the company that is favorable to them in order to achieve their objectives.
• The sales cycle. Depending on the length of the sales cycle of the product and/or service offered by the company, the variable part will be more or less important. A long sales cycle means that the volume of sales will be lower than for a short cycle, and therefore generally speaking, the share of variables is less important.

"The split between fixed and variable pay should be continuously reviewed in line with the maturity of the business and the products."

Vladimir Ionesco, Director of Global Sales Performance at Doctolib

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6. How to communicate effectively on sales remuneration?

Last but not least, communication. Indeed, in order to reap the fruits of the work previously accomplished, it is essential to communicate in a clear and transparent manner, without which, variable pay will have little or no impact on the attractiveness, motivation and loyalty of sales teams.

Here are some basic rules to ensure that variable pay schemes are well communicated:

• Communicate regularly. According to a Gallup Study, only 40% of employees claim to know their company's values and objectives. "Communication is the art of repetition", communicating at the time of onboarding is not enough. Indeed, although this is an important moment to give employees transparency and visibility and to help them project themselves, it is essential to regularly remind them of the functioning, rules, objectives, etc. of variable pay. Examples of privileged moments to communicate: review of objectives, team meetings, end of quarter, sales team seminar, annual interview, etc.
• Be educational and transparent. It is essential to ensure that the variable pay model(s) in its entirety, i.e. the fixed/variable split, accelerators, increments, etc., are understood by all. The reasons for these different choices must be explained transparently, and in particular how these choices serve the company's objectives. This can be done through regular communications on the topic, through a dedicated discussion channel or during individual meetings. 
• Listening to employees. Variable pay is a source of attractiveness, motivation and loyalty only if it meets the needs and expectations of employees, which is why it is important to listen to them on the topic and take their comments into account. This does not mean that you should respond favorably to all their requests, but that you should study them and come back to them with a constructive response. 

However, without tools, following the above rules to the letter is very time-consuming and requires a lot of time and energy from the teams involved. 

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7. How to deploy and enhance your commercial remuneration policy?

Today, too many companies still complete all the previous steps but manage the subject of variable pay with ill-adapted tools such as Excel or Google Sheet.

"Excel involves formulas that are sometimes broken, calculations that are sometimes a bit opaque since Sales didn't necessarily understand them and, above all, ergonomics that are not as obvious as Qobra."

Clément Bouillaud, Director of Operations at Partoo.

According to a study on variable commissions in France carried out by Qobra and Modjo, 68% of employees who use Excel or Google Sheets to calculate and manage commissions are not satisfied. On the other hand, 85% of employees who use commission calculation and management software are satisfied.

Indeed, there are many disadvantages to using these solutions: manual entry, opacity, no connections with the CRM and payroll software, lack of visibility, no sales emulation (SPIFS), time-consumption, etc.  

Results ?

Lack of commitment and motivation from your teams, waste of time for people in charge of variable pay, high turnover and lack of attractiveness. In other words, the exact opposite of the benefits promised by variable pay (the cobra effect).

It is therefore essential for the company to have a tool that enables it to deploy and enhance its variable pay policy. In its selection, the company must in particular favor a tool that: 

• Avoids manual input errors
• Automatically calculates the amount of commissions
• Transmits commissions to the payroll department at one click. 
• Helps employees to know exactly where they are at achieving their goals
• Provides the same level of transparency for employees, managers, finance teams and HR teams.

A set of requirements that Qobra meets with its commission calculation software.

"As we know, the best sales people pay a lot of attention to their variable, so they very often want to know where they are in achieving their goals. With Qobra, you can directly see in real time, as a Sales person, on your dashboard, how much you are going to earn." 

Matthieu Saroli, Enterprise Account Executive at Didomi.

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The final word...

A successful sales remuneration policy is a source of attractiveness, motivation and team loyalty. However, there are several rules to follow to make it work, namely to create a compensation plan that is simple, linked to the company's objectives, fair, transparent and easy to implement.  

It should then be adapted to each type of function in the sales team, i.e. Account Executives, SDRs, MDRs and CSMs. Then, depending on their function and other peripheral variables, the share of variable pay in the total remuneration should be determined. 

Finally, it is essential to properly disclose and deploy this commercial remuneration strategy by following communication recommendations and using tools dedicated to the management of variable remuneration.