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1. The underlying assumption is that rewarding salespeople
financially for performance will encourage them to work
harder and sell more in pursuit of those rewards. This view
is not borne out by academic research but in practice sales
commission schemes are almost universally used. A
carefully-designed commission scheme when
implemented on top of good management practices and a
solid sales process is a useful management tool - but it is
not a substitute for these things.

2. How to design a sales commission scheme

3. Commission schemes are usually implemented at
individual level

4. Ensure that the rewards incentivise the behaviour you
want. You may want different behaviours from an account
manager and a sales representative

5. Think carefully about the balance between basic salary
and commission. The two combined form the OTE (on-
target earnings) and the balance will have a strong impact
on the motivation and behaviour of the salesperson:

6. The lower the proportion of basic salary the higher the
OTE, since you are transferring risk to the salesperson

7. A high basic may mean that salespeople do not need any
sales to achieve their minimum acceptable income

8. A low basic may result in aggressive sales behaviours or
high staff turnoverDecide whether the scheme should be
based on sales revenue or gross margin:

9. Revenue is relatively easy to measure but may result in
unwanted price discounting

10. Gross margin supports prices but is more difficult to
measure and can be open to manipulationImplement
appropriate controls on the sales process:

11. A pricing model or pricelist

12. Sign-offs

13. Commission payments only after contracts are
signedUnderstand that every commission scheme will
have unwanted side-effects:

14. If a salesperson feels they are not going to achieve targets
they will hold back new opportunities to the next year

15. Individual targets will prevent salespeople working as a
team or spending time on anything that does not
contribute to the current target

16. Salespeople will go after the easiest opportunities, which
might not be the ones that matter most strategicallyCheck
that you can afford all possible outcomes and that better
performance against the commission scheme results in
improved net margins for the business under all
circumstancesMake sure that commission targets in total
exceed the sales income budget - assume a conservative
proportion of target sales will actually be achievedThe
overall commission scheme rules should be published
annually and each salesperson should have a written copy
of their own targets and rewards, signed by them and
their managerReview performance with each salesperson
monthly

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