Setting sales targets and commission plans (10 Tips for each)


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Setting Sales targets and rewards can be both an emotive and challenging process, but it does not have to be. The process is more science than art so its mainly a numbers and motivational exercise. This paper gives some tips as to how to approach the process for both traditional and eBusiness and provides a link to a more detailed paper which goes into the detail.

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Setting sales targets and commission plans (10 Tips for each)

  1. 1. 10 Tips for setting sales targets and 10 tips for commissionThis is a summary of a detailed paper which outlines the critical success factors in setting salestargets and commissions for both traditional and digital selling. The detailed paper can bedownloaded at Target setting considerations 1. Before setting Sales persons targets understand the overall business Sales goals (which will be your Sales function targets) – Sales resource targets must add up to total 2. Be clear what the important Sales target categories are for the target period (Units, Volume, New Revenues, Current client revenues, Gross Margin, Operating Margin or some mix) – Sales behaviour and focus will be determined by the category types 3. Understand the flexibility a Sales person has in setting price as this can influence targets – Have they the skill, structure and controls to still achieve the annual/period targets 4. Understand the cost of sales and how the sales person can impact – Is there self-correction incentive for the sales person to minimise the cost of sale. 5. Document the starting point , the pipeline for the person (backlog, closing, named qualified, named unqualified, un-named) – Sales targets need to be based on capacity for new closures, not stuff already in the bag 6. The individual’s capability, the context has to be considered, past performance, relative performance, scope of target market. – Though sales standards are important, one size fits all may be inappropriate. 7. Stakeholder belief, all stakeholders must believe the targets are ambitious, achievable and appropriate – Secure commitment to the target 8. Involvement, in the process ensures, ownership, accountability, and commitment – Sales person motivations and success potential is radically enhanced by being part of the process 9. Expectation Management, The target setting process is a negotiation to align the company’s needs with the individuals, managing expectations in an open, transparent manner supported by facts – Closing the gap between sales persons target and business needs early in the cycle. 10. It’s a scientific numbers game, document the basis for setting targets, marketing creates leads, sales also create leads through activity, sales activity converts leads to prospects, to proposals to contracts – Sales people must understand it’s more a science than an art.10 Commission planning considerations 1. Variable Pay (Commission) influences behaviours, you want to encourage the right behaviours, sales actions and activities – Prevent Sales people doing bad business by having the correct commission plan 2. Sales Motivations are important, good sales people are motivated by different things , though earnings needs to be central, do not forget other motivators such as recognition, career etc. – One size may not fit all 3. Fixed versus variable pay, commission could be up to 60% of on target earnings (OTE), however it must consider the nature of the business and sales process. – Low volume, High Value and/or complex team sale, and/or low sales automation, and or long sales cycles usually attract higher commission rates, the inverse is also true (See white paper graph)©Declan Kavanagh Setting Sales Targets & Commissions
  2. 2. 4. Commission & the business model, at a sales unit and business unit level commission must be considered to ensure overall gross margins are achieved – Plan and accrue commission at rates that ensure after commission GM targets are achieved. 5. What should you commission? Volume where it’s a tactic to clear stock or kick start a new product, or where unit price and GM are tightly controlled. Revenue where Sales person influences price but not cost, GM where there is flexibility for sales. Combinations can be used to control and incentivise. Thresholds should be set to earn and sliding scales can be used – What you commission is what influences the sales person, link it to business model goals 6. When do I pay commission? The usual target and commission cycle is annual, but payments can be as frequently as weekly depending on the sales cycle, payment cycle, nature of sale and ability to measure. Its normal only to pay when cash is collected or guaranteed, reconciliation at the end of the primary period is required (e.g. annually) – Pay commission as frequently as possible once criteria are met and with reference to nature of sales role. 7. Who calculates commission? The finance function bridges sales, delivery, HR and accounting, they are independent and also have the regulatory and accounting processes to ensure there is control and fairness in the process – The CFO-Finance dept. are best positioned to provide accurate and relevant commission information. 8. How long do I pay commission? This can be tricky as some sales people will sell multiyear revenues, add the complexity of New Sales handing over to account management, and/or changes to Sales structure during a period. There are a range of solutions depending on the context, however the sales person that assures the sale or component of revenue and cash receipt should have an incentive – Those who contribute to assuring cash receipt need to have some reward, often declining commission rates over a period to a stop point are necessary. 9. Commission adjustments and addendums, Accelerators, Bonuses & Caps. Accelerators are useful motivators where stretch targets are exceeded, increasing the commission rate for incremental sales, so long as the incremental value to the organisation exists. Bonuses competitive or to encourage a specific behaviour such as new customer acquisition can be used to motivate. Caps are emotive and there are arguments for and against, my preference is to have caps but make them attractive – Use all the tools in the tool kit to maximise performance underpinned by ensuring there is a financial business case. 10. The process is not an annual event but a continuous performance management process. The variable pay process needs to be aligned with the grade, comp and benefits process and the non-financial incentivised performance standards. The process needs to be documented, communicated and understood. – The annual target and commission plan between the company and the individual must be documented and signed by both parties.eBusiness & on-line Sales  The level of automation and control determines the nature of the KPI’s and commissions.  It’s all about how the human interventions attract visitors to the site and convert to sales  The level and type of human interventions such as live chat, contact centre influence structure.  The end goal and targets are financial revenues and margins so it’s not too different.©Declan Kavanagh Setting Sales Targets & Commissions