Which Commission Plan Drives the Best Sales Results?

Choosing the right commission plan for your sales team matters. I can tell you straight away that salespeople are motivated by one thing, and that's money. We want to make sure we put the right compensation plan in place to help them not only be motivated, but make sure they're bringing in great deals that help to serve the organization and grow us in a sustainable fashion. Welcome back to Culture and Compliance. My name is Matt Vadie, and I have been in sales and sales leadership roles for my entire career. Over 20 years. And in this video, I'm going to break down the different types of commission plans available to you as an organization and help to give you some thoughts, some things to think through as you decide which commission plan is right for you, whether you're just getting started with a sales team, hiring your first sales individual, or you're looking at updating your sales plan. I'm going to cover on a whole bunch of different options in here and talk about some of the pros and cons of each. So let's go ahead and dive in. So what are some of the different plans available to you? And I'm going to put a link to this document in the description so you can go ahead and, you know, kind of work through this on your own as well. So we've got straight commission. So if you're probably familiar with straight commission, we would all love to have all of our salespeople be on straight commission. And there are industries and individuals which this works great before, but what it is is basically they just get a percentage of each sale that they close with no base salary. This tends to work really well for career commission-only salespeople that know that they're kind of a hired gun. They're going to go out there and they're going to sell something, and they usually earn a lot of money. And I'm going to talk more about what— where this fits in the whole stack here when I come back and review all of these in just a moment. Uh, definitely high earning potential. You're going to need to go with a much larger commission percentage because you're not paying a base salary. And so people that really believe in themselves, this is a great plan for them because they know that they can perform and they know that they're going to get a higher commission because of it. And they can probably stay 1099 and kind of run their own thing. So definitely a good plan for people like that. But for, you know, maybe somebody earlier in their career that needs a lot of training, or somebody that, you know, higher— it's just going to create a ton of turnover, right? I mean, if you're going to go out and try to develop an army like a life insurance sales team of commission-only folks, I mean, you're going to hire 10 to keep 2. So Definitely something to keep in mind as you're looking at that. Next up, you have tiered commission, which is actually kind of a variance of revenue commission. But so commission rates increase as sales reps hit certain sales milestones. So the more they sell, the higher percentage of the deal that they earn. And again, this typically go— I mean, it can happen in any number of the next couple of— and even with the commission-only plan, this encourages them to sell more because the more they sell, the higher percentage commission they get, which means at year end, every deal they bring in, they're going to get it at that highest commission tier that they're eligible for based on where they performed in the year. And it's also going to discourage them sandbagging deals into the next year, the next quarter, whatever the cycle is. So yeah, the only challenge here is that it can be very complex to manage multiple tiers. If you're a small business, we've done this and we've had to kind of flatten out our tiers over time. We used to have too many tiers and it got to be a nightmare. Matter for accounting, not a ton of great automated solutions for this. So we did have to kind of reduce the number of tiers and simplify it a bit. But example would be, hey, I've got a base commission of 5%. Once I hit $50,000 in sales, my commission goes up there. You know, if I reach $75,000, my commission goes up to 7%. $100,000, it goes up to 10%, and so on and so forth. Like I said, I've worked in environments where we have had commission tiers as high as 36%. And every— and, you know, we started at like 7 to 10%. And everybody knew as the year went on, like, I want to get get through those first few gates as quickly as possible and start getting those big dollars later in the year. So it's a very motivating plan and can be applied again to just about all these other plans. So revenue commission. This is when sales reps are compensated based on a percentage of the total revenue generated from a sale, usually as a one-time payment. And usually that's calculated on the first year annualized value. So let's say a customer pays you $1,000 a month in the contract that you brought them in for. We would call that a $12,000 a year deal, then I would pay you a percentage of that $12,000 of the CAV, calculated annual value. Definitely good B2B plan, very common, very normal plan. You know, it's definitely obviously, you know, for them, it's going to do two good things, right? It's going to make them discouraged to sell the smaller deals because they know that the annualized value is going to be smaller and help them to prioritize larger deals, which for you could be a good or a bad thing, right? But ideally, we want them to prioritize larger deals. And so this is a very common sale, especially in our industry, in the payroll and HR industry. This is kind of the go-to for commission model. Next up is gross margin commission. I've worked in this in, in the staffing world before, but it's basically you're getting comped on the profit margin of the deal. So this works really well if they have any say in the profitability of the deal. So let's just say the staffing world was a perfect example. I could go out and I could sell you, you know, hey, we're going to bring 10 guys out here tomorrow at a 1.5 markup. And you go, well, my current company does it at 1.45. I go, all right, well, I can do it at 1.45 to win the business. Well, then I know that's coming directly out of my commission, right? So that's the thing is we're all incentivized to make sure that the organization is profitable on the deals. Less profitable the organization is, less commission I get. So the two are pretty well tied. Hand in hand. So it is a good, if you have some variability to your margins and margins are the number one tracker here, this is a great plan for that. Now residual commission can be tied to, can do residual or revenue-based. I like to combine the two and I tend to use the vernacular and in the enterprise sales world, you'll call this a bookings commission. This is what we booked the deal for. Revenue or bookings would be the CAV, the calculated annual value. And then the residual or revenue commission, sometimes again, in enterprise SaaS, we used to call this revenue, which is a trailing commission based on invoices paid and a small percentage. And so again, what I would have in that environment is a rep gets paid a, let's just call it a 10% of first year CAV and then a trailing 2% on all the revenue because they were really acting in a little bit more of an account management role. Which meant that they had to answer questions from time to time. They maintained a relationship with the client. They didn't manage 500 clients. They managed 20, 30, 40 clients. It was smaller number, bigger deals, but we wanted them incentivized to retain the business. So we had a trailing commission in addition to that one-time revenue upfront. So I don't like residual commission as a standalone for the reason of, you know, it takes so long sometimes for that revenue to be recognized. If somebody goes through an implementation process, and then, you know, you've got a lag from the time they get billed to the time the commissions get paid. In our world, that first revenue check, we used to do revenue in addition, or well residual as it's called here on the document, residual in addition to that revenue. So bookings and revenue, and it just took way too long for it to get into the rep's hands. So we wanted to make sure they got compensated earlier. So we would pay them this revenue, AKA bookings. Commission at the time of sale instead of waiting for 3 to 4 months afterwards. And then you have another option that you can use. This is a draw against commission. So sales reps receive an advance or a draw on future commissions, which means that, you know, or— and you can put this against base too. One of the ways that we'll use this as a tool is to say, hey, during your onboarding process, you know, maybe let's just say your base is going to be $50,000. When you're in your territory full. Well, we're going to make your base $80,000 for the first 3 months. And anything you sell is going to be pulling against that extra per month. And then you're going to kind of owe that back to the house, right? So this is good because it gives them some financial stability. It gives them some upfront cash, but it is just very hard to manage, especially for smaller organizations. If you're a large organization with a well-built-out accounting department, draws against commission can be a good thing. I'd say they are complicated and challenging to manage for smaller businesses. But again, bigger breakdown here. And then I've also got this table in here and I'll link this document in the description for those of you looking to kind of take a deeper dive. So how do you choose which one's right for you? I think there's a handful of things you want to look at, right? What is your sales strategy? You know, are your— do you have transactional sales? Are they consultative? Are they relationship-based? How many— what's the quota? How big is the quota? How much— how many deals are they going to close per year? You have to look at both sides. How can you maintain cash flow? Like, because if you're paying a revenue booking commission, let's just say again, we're using that example of a $12,000 deal. I pay them 10% and then that's $1,200 every time they book a new deal. Well, is that going to create cash flow issues for me as a company if I have to keep paying 10% of every deal upfront? Or do I have that in the coffers to make sure? Because I'm not going to have recognized that revenue from the client yet. And so I need to make sure that I've got cash to help pay those commissions. And next up, you know, you want to make sure you understand your sales objectives. Are you trying to push them for volume? Are you focused on profitability? Is client retention a matter? Because those things, again, like if I'm focused on client retention, then I really want to make sure I've got some sort of trailing residual revenue so that they're incentivized to maintain the client. Because if I pay them once, and this happens with one of our biggest competitors in this space, their whole commission strategy is they pay them once after they process 2 payrolls. Then good luck getting that sales rep on the phone ever again in your life because they are— there's no compensation. There's nothing tied there for them. And that's one of the biggest complaints is this salesperson came out and sold me the world and was here at my office for 20 hours. Then the second we signed up, they were gone. They vanished. And so you have to understand, you know, what do you prioritize as an organization? And then next, what type of salespeople are you hiring? If you've got big enterprise deals where they're going to be, you know, $50K+ annualized, then you're going to need more experienced salespeople, which means you're going to need a plan that is going to be made for someone who is more stable in their life, who has a, you know, a mortgage, kids, all those things. They're probably— you're probably going to need to mix in some draw possibilities. You're probably going to need to provide them with some bigger upfront commissions so that they can earn quicker. So understand what your sales reps are going to be. And like I mentioned earlier, evaluate your financial stability and the complexity of your offering. So this is a big one. This can't be understated because we've had people before where it just takes them. And I think this is a little bit different conversation, but you have to understand how long your sales cycle is, how long it takes somebody to get up to speed to understand your sales cycle, and that it could very well be 6 to 9 months before they're selling anything. And that's common. And if you're not ready to burn their base salary for 6 to 9 months, maybe 12, depending on the complexity of your deals, then you're walking into this a little too naive, maybe, because it's very rare that somebody shows up and starts selling on day one. So lots to consider here as you think about this and as you look to implement these solutions, just make sure you're being pragmatic. Make sure that you also understand that commission plans change Nearly every year in large organizations. Career salespeople are going to understand this. As long as you've got their best interests in mind and the organization's best interests in mind, then you're going to do right by them. And they're going to be happy to make sure that they've got a plan that they can maximize and that they can use to create value in their own life and for the organization. And this guide should help you on your path. If you have any questions, please don't hesitate to reach out to us, matt@guru.co. Happy to help. And there's tons of other insight in here to help you develop the right commission plan to not only incentivize your sales reps, but help your team to grow. Thanks for stopping by. Appreciate you.