Commission structures are common across various industries, however it can be tricky to know how commission fits into the wider reward process.
Every commission scheme is different. Even if businesses operate in the same industry and are the same size, the way their commission scheme plays out into the overall reward system will be different. This doesn’t mean that there aren’t common principles that all commission schemes need to include.
Whether you’re looking to refresh your current scheme or design a completely new one, understanding what makes a successful one is always the first step.
Why are commission schemes good for business?
Increasing sales and thus profit is a common and very important goal for every business – this isn’t revolutionary. Of course, to achieve this, business leaders may use tools such as commission schemes and bonuses to encourage the right behaviours and improve performance.
Commission schemes have a number of benefits such as keeping people firmly focussed on their goals. A commission scheme should be simple to understand and administer whilst focusing an individual to pursue their objectives and goals – often improving their overall performance.
At its core, a sales-driven commission scheme rewards positive performance but it can also have a dramatic impact on those not currently operating at their best. Through raising the bar and adding the element of competition, commission schemes can help business leaders identify underperformers and motivate them to do better.
What makes a commission scheme successful?
A commission scheme is most powerful with performance-driven people. This means that identifying individuals who are motivated to overachieve with the potential to earn more during recruitment is very important.
Salespeople who use their talents to bring in business should be rewarded. Commission schemes are a great way to support salespeople who have a strong line of sight or when the business is pushing new services / products. This approach can support short sales cycles and specific campaigns very well.
An effective commission scheme has a formula to calculate the payment and the opportunity for payment. It provides a predetermined incentive amount for each discrete unit of sales made by the salesperson. This could be calculated by revenue, profit or a dollar amount per unit sold.
As opposed to bonuses that are usually paid out every 12 months and with different parameters, commission schemes are often most successful when paid out monthly – creating short-term objectives and goals for salespeople.
You might use a commission scheme, as opposed to a bonus, when the results of sales are primarily achieved from the skill and effort of the salesperson. The scheme is much more individual-focus, rather than team or company focus where a bonus scheme may be more appropriate.
Over time, commission schemes age and this can be because of changes in the market. For example, what was a good target in the past is now impossible to reach or perhaps competitors have more engaging schemes in place and you’re losing your best talent.
Whatever the reason, refreshing your scheme is always a good idea. A regular review of the scheme can avoid over or under payments against the market and ensure it’s simple to understand and continues to keep employees focussed.
How can Strategic Pay support your commission scheme?
At Strategic Pay, the focus is to ensure your business has the right reward structure in place. In the example of commission schemes, we can help to review and design incentive schemes and model future scenarios – getting an understanding of what you want to achieve now and in the future.
Partnering with your business and gaining an in depth understanding of your capabilities, your products and overall market performance, our team can analyse your current schemes and help align it to your business drivers. Of course, this should be done periodically, ensuring commission schemes are always fit for purpose.