Designing Sales Commission System for your Staff

Most companies
with sales staff tend to offer sales incentives in the form of commissions or
other forms of incentives. The key question to ask for every business running
such scheme is: Does paying incentives increase sales? If your answer is yes do
you have enough proof to back this assertion?  Here are the reasons why paying an incentive
is actually giving a free salary.

The first major
problem is how much of the sales volume changes are a result of the sale
person’s effort. In practice we find that much of the sales increases are a
result of the organisation’s investing in marketing and or promotion activities
rather than the efforts of the sales person. 
There are certain products that have a high sales carryover; sales in
the current period resulting from efforts invested in prior year.  If you have products with high sales
carryover giving a sales person a sales incentives is actually giving a free
salary. In high sales carryover environments sales were going to come anywhere
whether the sales person did something or not. 
In such cases it better to play with the basic salary instead of
implementing a sales incentive programme.  It is therefore recommended that before you
implement a sales incentive scheme you calculate the amount of sales carryover
for each product to establish whether establishing a sales incentive scheme
will positively impact sales. This will definitely help you avoid wasting money
by giving a sales incentive where it’s not necessary. It is also advisable at
this stage that you look at factors that may lead to sales carryover so that
these can be communicated to key stakeholders. 
I am sure there are some out there who have experimented with sales
incentives but found no positive impact due to some of the reasons outlined
above.

Let’s
take an example where sales carryover is 50% of sales; this will mean that the sales
commission will be calculated on 50% (non effort sales) plus efforts sales of 50%.
 This is a case of adding staff costs
when there is no corresponding value being created and such cases should be
avoided at all costs.

In markets where
there is low sales carryover commission based sales incentives can work very
well.  Examples of such markets are in
selling insurance products. In such cases it is better to go for a no basic
salary at all and give a straight commission.

Sales commission can
be effective in times where you are introducing a new product. In such cases
you need to balance between what you pay as a basic salary and what you pay as
a sales commission.  In situations where
a company already pays a high basic salary sales incentives is unlikely to
motivate people to sell more. 
Introducing a sales incentive in that environment is a waste of time and
company resources. Sometimes such schemes bring unnecessary disharmony within
the employee population.

It should be noted
the sales carryover problems can be addressed when designing sales
incentives.  The solution is to go
through a proper design process that takes care of all issues at every stage of
the design problems. Sales carryover is the major problem in sales incentive
design. The other problems are easy to solve with the right guidance.

Memory Nguwi is an Occupational Psychologist, Data Scientist, Speaker, & Managing Consultant- Industrial Psychology Consultants (Pvt) Ltd a management and human resources consulting firm. https://www.linkedin.com/in/memorynguwi/ Phone +263 4 481946-48/481950/2900276/2900966 or email: mnguwi@ipcconsultants.com  or visit our website at www.ipcconsultants.com