I spent part of my career at a financial institution, designing commission plans for a sales force of more than a thousand people. The sales reports soon flagged up the fact that some people were low performing when it came to sales. It didn’t seem that unusual at first – in a sales force of that size, some people are always going to under perform.
But there was something strange about this case.
All the under performing people had previously done well and had established reputations as being great sales people.
So why the sudden change in achievement?
I took a closer look at the reports, and the answer became clear: Our salespeople had to achieve at least 60% success rate in all of their three measures (targets) in order to get a commission payout. That meant they could have an outstanding performance of 100% in two targets, but if the third was at 58% they’d get nothing.
I had to wonder if the system was too rigid. Would our sales people really be motivated to do their best work, knowing that no matter how well they did, missing just one out of three targets by a couple of percent meant they got nothing for their efforts?
I’m giving you this example because it illustrates what I want to share with you today: That in some cases there is a place for out-of-policy sales credits.
The Case For Out-Of-Policy Payments
Think about the example above (you’ll find more examples below, too). In cases where a salesperson has performed well or contributed significantly to their employer, but still doesn’t see a payout, there is a risk of:
- High turnover of sales people. Constantly missing commissions despite performing well is frustrating, and the sales person might well leave for a company that offers a better system. Not every system suits every sales person, but if there is a pattern emerging, it’s time to look at an exemption system for out-of-policy payments.
- Low performance. Think about the salespeople at my old financial employer. No one could blame them for getting so frustrated that they stopped trying as hard – and that would be bad for both the sales person and the team.
- Other objectives not being met. If a sales person has other duties, such as creating a new market or penetrating a strategic account, he wants to know he will still be fairly compensated for his efforts. If he’s only being paid commission for direct sales, he won’t give as much attention to the other objectives.
When Out-Of-Policy Sales Credits Are Useful
Imagine for a moment that a tech startup is struggling to get established due to well-known competitors who are backed by an experienced sales force and a strong brand reputation. After a year of trying to break into the market, one of the sales team lands a huge client, one who could change everything. Yet because the initial sale doesn’t quite reach the commission threshold, they still get nothing for the effort.
In cases like this, management might decide that a payment outside the commission plan might be in order and be effective. After all, the new client is potentially worth a huge amount to the company, and the salesperson might have just turned the company’s fortunes around.
Out-of-policy sales credits could be deemed appropriate for:
- A sale that wasn’t forecasted, but that makes a big difference to the company.
- A significant sale that ushers in a new era or turns the company’s fortunes around.
- A notable sale that management wants to reward as an example to the rest of the sales force.
- Two people work together and though their individual results are under target, as a team they’ve brought in a significant amount of sales.
- Events such as significant client acquisition, cross selling, or anything else that isn’t covered by the commission system but is a notable achievement.
- Any situation where commission guidelines have not been met, but where managers believe a payment would be appropriate.
Change The System Or Make An Exception?
There are two potential ways to handle situations like those I’ve outlined here: Management can either change the system to cover such situations, or treat specific events as exemptions.
If there’s a noticeable trend of good sales people falling through the cracks and not getting commissions, or sales staff turnover is on the rise, it might be time to consider changing the system.
On the other hand, if the system is working fine but there are simply a few notable exceptions, treating them as an exemption will be easier and more cost effective than changing the whole system.
In my opinion, the latter is the best option in all but a rare few cases. It’s impossible to come up with a system that covers all cases and events, which makes it difficult to draw up a totally comprehensive policy. It’s simply more practical to make exemptions.
Out-Of-Policy Payments Must Be Carefully Planned
There may be cases where an exemption is the best choice, but it’s important to keep in mind that out-of-policy payments can still be high risk for a company, both financially and in terms of operations. That’s why I recommend a company takes the following steps:
Set up an exemption committee. Imagine the consequences if the power to approve exemptions was given to the wrong person: Unfair decisions, too many or not enough exemptions, an uneven policy and a disgruntled sales force.
Set up an exemption committee to make decisions together. I recommend having one team to carry out the preliminary assessment and make recommendations, and a senior management team to assess their findings and make the final decision on payment.
Write up an exemption policy.Even though each case will need to be assessed individually, there will still be rules and regulations. You should include topics such as:
- Who can approve exemptions?
- What does the approval process look like?
- What is each person on the committee responsible for?
- How long do decisions take and how are they communicated?
- How is the payment amount decided upon?
- How and when are payments made?
Be clear about approving lines. Part of the policy must include a very clear understanding of who has the power to approve what.
Start a log book. Keep a record of:
- How many exemptions are given
- How much was paid
- Who they were given to
- Who approved them
Audit regularly. The log book should be audited every six months to ensure that exemptions are being allocated fairly. If one person seems to be getting a lot of exemptions, it’s important to know they were given with good will and no favouritism is being shown.
Auditing also flags up potential problems with both the exemption system and the commission system. For example, if a company finds too many exemptions are being given for extraordinary items, there’s a real risk that the extraordinary items will become ordinary and the company will end up paying too much out of pocket. Auditing lets companies see where policies are faulty and need to be rewritten.
No sales commission structure can cover every possible scenario. A robust exemption policy lets a business reward sales people for exceptional work that falls outside of the policy.