Many organizations make the mistake of capping a Salesperson's (or Sales Manager's) bonus and/or commission once they hit a certain percentage above goal. This is the dumbest idea since the square wheel. Here's why:
No matter how much over goal a Salesperson sells, the company makes revenue that is beyond its goals. Some companies make the excuse that keeping all of this money is a buffer in case other Salespeople fail to hit goal. If you built your sales goals properly, this buffer should have already been factored in.
You're just being greedy.
The worst part is that it encourages your Salespeople to sandbag. There is more possible revenue out there but, since there is no incentive for the Salesperson to bring it in now, they will either 'save it for a rainy day' or let it go to a competitor. Either scenario creates a hole in your market share, and an opening that your competitors are sure to exploit.
Think about this a little deeper, and you'll realize that your Salespeople feel like they're actually being penalized for being terrific at their jobs. How is it their fault that you set their goals too low? If you were them, and you came in ahead of goal, wouldn't you start looking for another company that values your skill and consistency more?
Of course you would.
Capping commissions and bonus at a certain percentage in a tiered compensation plan is fine, as long as the amount of money that the Salesperson (or Sales Manager) can make is uncapped. For example, let's say you have a commission structure where Salespeople make nothing until they hit 85% of goal. From 85% to 90% of goal, let's say they make 1% of net margin (or whatever makes sense for your industry), then 1.5% of net margin for 90% to 95% of goal, 2% for 95% to 100% of goal, and 2.5% of margin for anything above 100% of goal. This is fine. But if you say that a sales rep can only make 110% of their base pay in commission, regardless of how far above goal they are, you are begging them to sandbag (if they're merely competent) or leave (if they're terrific).
You want Salespeople to be hungry, so it makes sense for a substantial portion of their compensation to be commission-based... at least 25%, and probably not more than 50%. (This assumes that your Salespeople spend the bulk of their time selling, and not doing non-sales-related tasks.) You also want to be sure that they sell at least 10 times as much in revenue as they make in compensation (again, depending upon your industry and your margins).
How often do you pay commissions?
If it's less often than monthly, you're missing the boat. Salespeople respond to immediate feedback, positive or negative. If they push hard during a given month, they should be rewarded at the end of that month (or punished, if they did poorly).
You want the reward to come as soon after the action as possible.
I don't mean 2 weeks into the following month; that's ridiculous. If Accounting tells you they can't do it, tell them to go bugger themselves and find a way to get it done. I guarantee that the number of Salespeople who hit goal after you make this happen will dramatically increase. Part of the reason is that, if commissions come at least once a month, Salespeople begin to shift their lifestyles up a notch in anticipation of this reward. In other words, they buy things on credit, and then have to hit those higher goals just to keep up the payments.
This is why you will encourage your Salespeople to buy new cars, boats, nicer houses, big vacations, and so on. The more they spend on themselves, the more they'll begin to feel that they deserve those things and more, and the more they will have to sell to perpetuate that self-image.
You want the reward to come as soon after the action as possible.
I don't mean 2 weeks into the following month; that's ridiculous. If Accounting tells you they can't do it, tell them to go bugger themselves and find a way to get it done. I guarantee that the number of Salespeople who hit goal after you make this happen will dramatically increase. Part of the reason is that, if commissions come at least once a month, Salespeople begin to shift their lifestyles up a notch in anticipation of this reward. In other words, they buy things on credit, and then have to hit those higher goals just to keep up the payments.
This is why you will encourage your Salespeople to buy new cars, boats, nicer houses, big vacations, and so on. The more they spend on themselves, the more they'll begin to feel that they deserve those things and more, and the more they will have to sell to perpetuate that self-image.
And while you're talking to Accounting, remind them that a Salesperson should receive repayment for business expenses no later than the paycheck following the date that they turned in their completed (and accurate, please) expense report. You want your Salespeople to spend every waking moment thinking and talking about selling, not wondering when or if they're going to get paid back for that cab ride they had to take to the airport.
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