In sales, the commission plan is everything. Think about it; if too generous the company cannot make the profits necessary to continue to function and provide employment opportunities. Too conservative and you will create ill will and lose valuable employees. Commission plans must incentivize business development and promote a sense of appreciation for a job well done.
For the last seven years I have spoken to dozens upon dozens of owners accumulating basic information about the dos and don’ts regarding commission plans. I also interviewed many search consultants who made the switch from employee to owner. And, I went outside our industry to interview other sales professionals regarding their commission plans.
From a financial standpoint, it appears a good target for overall production should be 40-42% of sale. Lower producers will range in the 32-36% and the high producers will range at or above 45%. At this level, the business should be able to operate at a good enough profit to accumulate capital in order to weather the storms and provide the owner incentive to stay in business. Also, it allows for the company to provide a good benefits program.
Please note, that the commission plan itself WILL NOT keep employees. What keeps employees is the culture built around that commission plan, including your investment in their personal well-being and professional development. People join your company because of you, and they will stay or leave because of you.
Draw or Salary?
Commission plans will imprint the culture you are trying to build in your company. For example, draw vs. salary. From my research it appears that draw structures are the most utilized in our industry. Draws seem to be a simple concept and it reduces the risk to the owner. But draw structures do come with weaknesses. First, the draw structure can be very difficult for a prospective employee to “sell” to their spouse, family or significant other, especially if they are not used to commission-based compensation plans.
The other weakness with a draw structure, and the reason I have moved away from it, is that I believe a draw creates too much independence or feeling of being “contract.” How many times have you heard, “Why should you care if I take the day off? IT’S MY MONEY ANYWAY.”
For me, that was not the office culture I wanted. So I moved to a salary structure. That said, the commission plan had to change. In a salary structure, reducing the amount of commission on early collections will capture the salary back. Here’s an example
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- Draw of $2,000 per month with a commission rate of 35% on the first $100,000 results in a cost of $35,000.
- Salary of $2,000 per month with a commission rate of 10% on the first $100,000 results in a cost of $34,000.
Long-Term Incentive Plans
I would like to go one level deeper. Most recruiting firm owners I talked to wished they had a long-term incentive (LTI) program. When I looked throughout the sales industry, most of the LTI programs I researched were designed to help reward three areas: 1) annual high production; 2) tenure; 3) and lifetime achievement. They also structured the payments in such a way it would make it less attractive for producers to leave. Here is a simple example:
- Tenure production bonus for time with firm:1% of annual production after 5 years with the firm;
- High annual production: 2% of annual production for years over $400,000 in collections;
- Lifetime production: 1% of annual production for every lifetime million dollars collected with the firm, up to 3%.
The combined total of the above would be paid out 25% per year in four payments. This vesting period gives the producer something to “lose” if they walk away.
Think about it. You are rewarding the most valuable producers in your office, who, in most cases, are those requiring the least amount of your supervision. You are also creating a speed bump to make them slow down before leaving the firm, and sometimes that’s all you need to keep a good producer.
Commission plans should be thought out and planned. I would recommend visiting with your legal and financial counsel. If you do decide you want to make changes I would suggest you make them for the future hires only. Changing commission plans in the middle of the race is a great way to lose producers. I’ve hired some great producers who got upset over a commission change.