When Is It Right To Use Commissions As A Sales Incentives System?

An incentives plan is a technical idea. Because the majority of brand and organizations use salespeople sell products and services, it is only commonsensical to boost their morale with adequate incentives systems. The incentives plan will see to motivate them to produce the required performance and align them to the firm’s sales objective.

As said earlier, the incentives plan is a technical idea that involves a team of professionals to follow certain design processes to arrive at a program carefully. 

The design team is in charge of selecting the among others, the formula type, sales management, and the type of incentives to be deployed. Formulas used are bonuses, commission, pool, profit-driven pools, etc., which may be paid in different ways. 

Commission-based incentives are presented in two ways; it is either a percentage of revenue or a certain amount of money for a particular achievement. Take, for example, $1000 for every $2000 revenue. The commission can be fixed throughout the different levels of performance, or it can vary in different levels of achievement. It can apply from the first dollar of production or begin paying from a certain level (threshold). Some many different variations and tricks can apply based on the current and individual objectives of the firm. 

Let’s have a look at the different types of the commission that can be picked from;

1. Fixed- This type of commission is fixed all through. Regardless of the performance and results, the commission stays the same.
2. Ramped up and down- As the name suggests, this commission is based on performance level. This means the higher the result, the higher the commission and vice versa
3. Variable- This is done on “as the situation warrants” basis. The management decides what’s best for the system at all times.
4. Normally, every sales role has its own commission rates. A common practice of paying the same commission rate across all boards regardless of what they are selling and who they are selling to; might be wrong. A salesperson is given the commission to feel motivated about the sales role, and because every role is different, each should have its own rates. A company that has distinct roles and responsibilities can also have individual rates applying to each salesperson. Although more challenging to administer, this may be a more effective scheme, especially for a new company. 

Is there a good time to use a particular commission plan instead of others? The answer is yes; there is a right time for a perfect fit for a plan. There are a few cases that a commission plan is a better fit for an organization that has specific objectives. Some of these situations are given below: 

1. When the responsibilities of the sales role are clearly stated and linked to achievement, a typical example is when a salesperson is asked to bring a new set of customers to the firm.
2. When the sales role’s primary goal can be quantified, such example is giving a target to bring revenues of $300,000 by the end of the year or sign new contracts with ten new customers.
3. With regards to number 2 above, if the success of the sales role is measurable, such success which means targets has been met and the success is not based on qualitative factors, then a commission plan is suitable.
4. This has to deal with the primary goal. In the case of selling on the back of building a good network within an organization, then perhaps a bonus scheme is better fitting.
5. Mostly, a single salesperson effort is not always enough to convince prospects to buy products or services. They take time to consider their options and see if buying a particular product or service is of the utmost advantage to them at the time.  It can sometimes be market conditions, product competitiveness, market trends, or even the pricing that makes someone to buy. In his case, the effort of a salesperson in the sales process is minimal. When salespeople can affect the client’s decisions and drive them towards a specific buying direction, then a commission plan is relevant; otherwise, it is not. 
6. When salespeople have the power to make a sale more profitable and they negotiate the price, then a commission plan is more applicable. However, this is a sensitive area as the effort from a salesperson to increase the price and make a sale more profitable shouldn’t make the buyer’s position worse. 
7. Finally, when there is a reasonable territory allocation, and the company can set up quotas objectively and fairly for salespeople, then a commission plan is an ideal formula type to use.