Among many different options sales management has in regards to the sales compensation plans, there are two main types (and many variations) we observe in sales organisations.
Discretionary bonuses and structured commission plans.
As discretionary bonus, I mean any payment that takes place to sales people that are on a decision of a sales management and is uncoupled by any quantitative measure or KPI. It can still be under them a qualitative approach, where the management can decide on the overall performance of the sales person and decide a bonus. The level of it is decided on generic and personal criteria.
A structured commission plan is the one that every penny is paid according to a well-designed plan. It is most of the times based on quantitative and less on qualitative factors. It has specific measures, and a very specific pay-out. The pay-out can be in terms of percentage of the deal amount or in terms of absolute dollar amounts.
What works better for sales people?
Sales people learn to live and breathe with the variable compensation. What is the commission plan in place is one of their first question each sales person asks when joining a company. Sales people are very methodical to work out what to do in the next term. They will “read” the system and they will immediately make a plan in their head with the action plan to follow in order to make certain money. They work out the certain target to reach to make the money they want. Sales people need to see this link. They need to see in plain terms what needs to be done. And they will go for that.
Another thing about sales people is that they are numbers driven. Targets are the bible for them. Reaching their target is the success. Overachieving their target is a masterpiece. If they don’t have a target they go blind.
What about discretionary bonuses?
For sales people, success is measurable. It has a dollar amount. And if they reach this, they expect to get paid.
Discretionary bonuses cannot be forecasted, nobody knows how much they will be. Another thing about them, is that they are not linked to the performance of the sales person. There are cases where the performance of an individual is exceptional, but because of a poor performance of the sales team or the company, bonuses are not granted.
Conclusion – what is best to do?
There is no doubt when it comes to sales people, discretionary bonuses are not an ideal motivational tool. Sales people will sooner or later challenge such compensation plan with good chances leaving the company.
Get a proper plan done now – design a sales compensation plan that matters to them.