June 5, 2014

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Article

Skin in the Game

Making Commission-based Compensation Work

By John Coon and Heather Stewart

June 5, 2014

Commission-based compensation offers several advantages to businesses—especially startups. Commissions can help jump-start sales while keeping bottom-line expenses under control. They can also help a new business or small business recruit a larger talent pool to help it grow while saving money.

Clifton Tolboe, CMO of PretendWear and managing director at ThoughtLab, says commissions are a great incentive for helping an employee feel invested in the company. “It’s causing the contractor or the employee to have some skin in the game,” he says. “Essentially, they’re going to do better work because the quality of work they’re going to produce is ultimately going to affect how much money they make.”

But making commissions work long term requires crafting a compensation structure that is a win-win for employees and employers alike. Here are some things to consider when developing a commission-based compensation structure.

Run the Numbers

Too often, new entrepreneurs throw out a commission offer—say, 10 percent of every sale—without running the numbers to make sure they’ll end up with enough profit. So says Russell Lookadoo, president and chief strategist for HRchitecture. “Test the plan in advance,” he says. “Run the hypothetical numbers and make sure you’re going to make at least as much as your salesperson.

Keep them Hungry

“Every salesperson wants to squeeze the most juice out of the deal they can for themselves,” says Eric Montague, owner of Executech, a company that uses commissions as part of employee compensation packages. “But the challenge is you have to make sure the commission structure always makes them hungry. You don’t want them to be able to sit back and not be hungry.”

Incentivize the Right Thing

You may want to think of the commission plan as incentivizing behavior, rather than incentivizing sales. Do you want your salespeople engaging in cut-throat, Game of Thrones-style competition for every sale? Or do you want them working as a well-oiled team, striving for team goals and incentives?

“Incentive plans are extremely powerful tools,” says Lookadoo. “You need to understand the culture of your company because culture can be tremendously disrupted by incentive plans.”

He also advises businesses to add a clause to the commission agreement that any behavior that is detrimental to the company’s interests will result in loss of the incentive.

Forestall Disputes

Consider all the “what ifs,” says Lookadoo. Address every potential scenario to avoid disputes between salespeople and between the company and its sales staff. How is territory divided up? How will clients be assigned to new sales employees? How will a commission be shared if two or more salespeople close the same sale?

Think Beyond the Sales Staff

Incentive plans can work for other departments of your business, too, says Kris Heslop, senior consultant for the Salt Lake Small Business Development Center. For example, if you want to increase sales of a specific product or service, you could have goals for the sales team and then incentives for the production team to meet a certain turnaround time.

Put it in Writing

Mark Tolman, an employment attorney with Jones Waldo, says putting together a written commission agreement helps anticipate disputes and avoid legal trouble down the road. Written commission agreements are also required by Utah law under the Sales Representative Commission Payment Act. Tolman suggests that a written agreement address specific questions such as:

  • When is a commission earned?
  • How is a commission calculated?
  • When does a commission stop?

“It’s not that hard to do,” Tolman says. “The amount of time it takes to put a commission agreement together is a few hours. If you compare that to the time, energy and money you’ll spend when a dispute arises later—it just pales in comparison to it.” 

 

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