As anyone involved in selling knows, a sale is never really finalised until the payments have been made, which could take weeks, months and sometimes years. So at what point in the process should the sales people expect to receive their sales commission?
The answer to that question may seem straightforward for most companies, particularly those well-established and matured. They determine when a sales person will receive their commissions based on past experience, with a combination of trial and error. What other factors should be considered, and is there a simpler approach to this process?
A starting point to finding resolution was to ask fifteen associates and colleagues in the sales management space. They all came back with similar answers. “Once the customer has signed the agreement, we recognize the credit to the sales people. And then,” most of them said, “we pay the full commission the following month”.
At first glance, it may appear that neither sales people, nor the company stakeholders give this area of the sales compensation scheme concept any further consideration. So let’s look at the risks involved by taking this approach in the following examples:
- Legal Aspects
Often the process of sorting out all the legal aspects involved in the deal can take up as much time as the selling and having the client accepting an offer.
- Where a sale falls over
If the salesperson has put in time and effort to complete a sale, only to have the lawyers step in and pull the rug from under the sale, should the sales person still be compensated? Should a sales credit be given with the acceptance of the offer from a client or with the signature of the agreement?
- Early Settlement
What happens if a customer is approved a bank loan, and the bank officer receives his commision, right after a loan is disbursed to a customer. The next day the customer repays the total outstanding loan, without earning interest for the bank. Should the whole payment of commissions take place straight after the sale or wait for the action of customers?
- Sales Performance
A sales person is paid based on their performance, typically assessed by annual or monthly sales targets set by the management team. Most of these targets are quantifiable and measured in financial or other incentives. For example a car sales person is expected to sell a minimum number each month, with a target of units to sell by the end of the year. In other cases sales people have targets in terms of profit they make or value the products sold worth.
Sales Commissions As A Management Tool
With a little imagination, compensation plans can be used by companies as a management tool, such as:
- Factoring in rewards and incentives to drive certain sales behaviors in specific directions.
- Keeping the team motivated to focus on sales initiatives.
- Sliding scales based on the level of success the sales people have in reaching set targets
It is after all in the interest of the company to have the sales people get paid the highest commissions, as this consequently means that they have succeeded in reaching those targets.
However, each company has certain objectives that change every year and depend on the maturity of the business and market conditions.
Take Harry’s company for instance. He’s the sales manager of a startup technology company that has no market penetration and little brand awareness. Harry also has an interesting approach to sales. At this early startup stage he is keen to pay his sales people to primarily focus on raising product awareness in the market, without being stressed about closing deals.
Sales people go through mental highs and lows, and incentivizing sales behavior is not easy. With higher ticket items, such as selling a commercial real estate, there are many points of interaction with the client and lots of steps and levels before closing a deal. So one needs to analyze the process and decide at which point along the journey the sales person should be compensated
Let’s review the different stages in an opportunity lifecycle in a simplified way.
- The very first step is to identify a target company and the right target buyer within an organization.
- Meeting with the prospect, the sales person identifies a need or a problem and recommends suitable solutions and porposals for the target company.
- Then there is a thorough analysis to make sure the solution offered fits the specific needs of the company, including financial considerations and budgetting.
- Meeting with lawyers can make or break the deal. Depending on the company there might be a long legal process when drafting and revising the terms of the agreement; this step also encounters risks.
In general terms, the higher the price tag of the sale, the more stages in the process are encoutered. Every stage along the way has to be a winning step closer to fonmalising the deal.
More steps along the path generally leads to more people being involved in the overall sales process. And the question around which of these people should be compensated, is something in the sales motivation world called eligibility.
The above example outlining the four main steps involved in the sales process, identified people such as account managers, strategic managers, sales consultants, pre sales, etc. coming into the picture mainly to assist the sales person to win a deal.
In simple terms, a few factors should be taken into account on deciding who is eligible for sales incentives; the direct communication a person has with a client and how that person is affecting the customer’s decision process.
Based on the above we can generalize and conclude that in every step of a sales opportunity what a sales person does is that he assists the client;
- To move to the next step
- That the concepts and proposals are worth considering
- Identifying a problem requires immediate response
- To take a decision quickly on the matter
- That budget would be worth spending on this area of business
- That there is growth in certain areas or there is a way to improve processes or decrease costs
- And others…
The dilemma for any company is identifying the specific stage in the sales process as the point of granting sales compensation to the sales person.
Most companies looking at the end of the lifecycle of the deal, and recognize the sales credit when the customer signs an agreement, at which point they pay the sales commissions.
Is This The Right Approach?
The fact that this might be market practice doesn’t necessarily mean that it would work for a specific company. Both recognizing sales credit and payment as part of the process requires careful thought and adaptation to individual circumstances.
Going back to Harry’s startup company in the technology sector. They launched a fantastic idea in the market, but being a startup, no one knew them in the market. Harry’smanagement group decided to split the sales into two teams:
- The first team would find new hot qualified leads and sales opportunities, turning them into orders, and
- The second team would take these orders into the legal stage, bringing back agreement signed by the customer.
Now the company had two different sales teams, each with their own objectives.
Where it was logical to pay the second team credits following the signing of customers contracts, this sales compensation plan would not be suitable for the first team who were not involved at the contracts stage
Timing Risks When Paying Sales Commissions
By paying a sales commission before the sale is completed, the company runs the risk that the sales person will believe their work to be done, and move on to focusing on their next opportunity for financial renumeration.
Whereas paying a sales commission too late in the sales process, the company runs the risk that the sales person will lose motivation, or become so demoralised, they look for opportunities with other companies offering more favourable compensation schemes, or abandon the sales process focusing on their next opportunity for financial renumeration.
Here’s another example, where a company selling a large computer system relies on the successful implementation to a client’s site. After the sales person’s work is done, they have to wait for technical support to drive the installation to the final stage to complete the sale. Now they no longer have any input or control in the process, but are paid only at the time where the agreement is signed from the customer. How would the sales person feel if they had to wait for two years before the installation is completed?
Or the situation where the installation is never done, resulting in negative consequences of reputation risk and legal risk for the company, when at the same time full incentives and commissions are paid.
A close friend of mine working in the banking sector once told me that a system they bought many years ago was never installed during the ten-year term of the agreement. Although the client paid, there were disputes about some payments, and the software company’s reputation was adversely affected. Though, in this particular case, the commission was paid to the sales person.
Balancing Customer’s Wants and Sales People’s Needs
Often referred to as “persuasion”, the goal in sales is to offer prospective clients solutions to make their lives easier and simpler, to create a win-win-win scenario for the sales person, the company and the customer.
The goal of a Sales Compensation Plan is to persuade the sales team to sell the right products to the right clients, with the right incentives at the right time within the sales process, while keeping the sales person happy financially.
Depending on the industry, the product, the sales process and supporting functions, the level of persuasion level needed can be different. For example, in a case of a supermarket or an online store a sales person has almost no involvement in persuading a customer. This work is done through efficient marketing campaigns.
In a complex deal where many people are involved and the target is a big global organization, the role of a sales person is to create a series of winning decisions. Through negotiations with people in many different departments, and by reaching successful outcomes, sales people are financially rewarded.
Three Key Factors To Determine When To Pay Sales Commissions
There was an old saying before the invention of “political correctness”.
“It ain’t over ‘till the fact lady sings” – In this article we’ve been looking to determine at what point we hear the singing. How do you determine which is the right point in the process to award credits to a sales person?
There’s no “one size fits all” answer to this particular question. Though situations and circumstances vary, and cannot be generalized, here are three factors to consider:
- Company’s strategy
A startup company has totally different short term objectives compared to a company that has been operating for twenty years in the market.
The startup might be looking to approach a very specific industry and get known, whereas a matured business might need to retain the best customers they have.
Each compensation scheme would reflect the company’s strategies and short and long term goals.
- Market convention
“That’s what everybody does in this industry” doesn’t always work. Often companies stand out in the market place because they have broken market conventions.
Although this is a personal decision, it does depend what others in your industry are doing and what the current situation in the market is.
In a deep crisis period, the objectives of the company may change with prioritizing the retention of the customers. Compensation schemes that were geared on obtaining new clients may need to be revised to encourage the sales team to focus much more on the upsell or cross sell to the existing clientele, a strategy that will allow the company to increase its revenue stream from their regular clients.
In these cases, the point at which the sales people are compensated might be adjusted to suit the market conditions.
- Sales force maturity
Is a sales person capable and skilled sufficiently to drive the whole process from creating interest to fulfilling the order, to have the customer paid and keep him happy?
Depending on the experience and the maturity of the sales force, the company can incentivize them differently.
If no one is buying your product or service, then you are not in business. So without sales people, a company does not survive. Without the right sales compensation plan that includes a mutually agreeable timeframe for compensating the sales team, the company will suffer.
In conclusion, sales compensation plans are all about keeping the sales team, the company, and the customers happy enough to hear the singing..