Best Practices in Commission Pay Plans

HR Resource
December 4, 2012 — 2,299 views  
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If there was ever one essential rule of commission-based pay plans, it most certainly has to be a business development team’s compensation must be built around well-established benchmarks, performance indicators and company-wide objectives. Granted, that sounds like a fairly involved process, and it certainly sounds like more than one rule. However, it really comes down to making sure that the performance portion of a salesperson’s compensation is aligned with the company’s long-term goals and objectives.

Compensation Plans for Salespeople:

Any commission-based compensation plan for salespeople must be based on either sales revenue, or gross profit on sales. Now, a number of companies prefer to keep the profit on sales apart from the salesperson’s activities. In this case, they don’t want sales to be influenced by gross profit as part of their sales process. For these companies, the focus is on selling the product and not necessarily playing around with its pricing. However, for the most part, today’s enterprises pay commission on gross profit. After all, no matter what revenue is generated by sales, if there’s no profit, then there’s no benefit. Depending upon the gross profit margins generated on sales, a company could pay a commission of anywhere from two to three percent.

Compensation Plans for Business Development:

While an argument can be made that business development managers should have metrics structured around gross profit, this often takes a back seat to the business development manager’s main priority to grow the company’s market share. In this case, the compensation could be based on the increase in market share for the entire company, or for individual product lines. For those enterprises that treat their sales and business development team as one, an emphasis may be placed on how well the department increases inventory turnover. After all, a product’s costs of goods sold (COGS) include a company’s costs to finance and its costs to manage its inventory. Since gross profit is sales minus COGS, it just stands to reason that a portion of the compensation structure be built around the speed at which the company is able to sell its inventory.

Quarterly Performance Bonuses:

Again, if the gross profit margins are healthy, it’s commonplace for companies to include a quarterly and yearly bonus program. The percentage is once again tied into the gross profit on sales and the company’s short-term and long-term goals and objectives. Periodic periods of reflection should be used in order to make sure that the company is on track to attain its growth metrics.

While it does sound like an involved process, it really comes down to making sure the company’s goals and objectives are aligned with the compensation plan for sales, marketing and other business development team members. From that point forward, those objectives can be broken down by gross profit, sales and or market share. In the end, it means the company succeeds when employees succeed.


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