Matthew Hayden heads Sales for PE Appliances, a home appliances company headquartered in Louisville with a pan-US Market. While his overall experience in sales spans twenty-five years, Matthew's been working at PE Appliances for the last twelve years. His team consists of four regional sales managers (Northeast, Midwest, South, and West) leading a distributed sales team of twenty-five salespeople, across the US. Matthew knows every sales executive on his team as he interviewed each one of them and got them on board. His biggest challenge today is keeping his team motivated.
Matthew got an email recently and is trying to find a way to solve this problem. The email was sent by John, who reports to Matthew, and has been working at PE Appliances for the last five years in the midwest region. At PE Appliances, the sales incentive is calculated for two periods: January to June and July to December. According to John's calculation, for the sales targets he closed between July and December 2022, he must receive a commission of USD 40,000. However, John received an email from HR stating that his sales commission comes up to USD 35,000. HR got John's sales commission numbers from the Accounts team. There was a mismatch in the commission as John's calculation was based on invoices raised until December 31, whereas the Accounts teams' calculation was based on revenue realized, which means money received in the bank.
PE Appliances made revisions to its commission policy, which went into effect in January 2022. Though this information was communicated via the social intranet, it wasn't reinforced through email to every sales executive. When Matthew walked his team through the new policy John was on leave. Now Matthew must solve this matter as John has escalated the problem with the mismatch in commission calculation. Even though this is a small matter to solve for Matthew, it will have cascading effects.
Matthew knows his team will be closely observing how this problem gets resolved as many of them are either going through similar problems or don't know exactly how their sales commission is calculated. The sales executives are demotivated as the recent increase in home appliance prices has impacted sales. The previous year saw sluggish sales due to the pandemic so the leadership set higher sales targets this year, causing sales executives to struggle to achieve their numbers.
Matthew recently attended his B-school alumni event and there he met his friend James, who also heads Sales for an automobile component manufacturing company. James was tackling a different challenge. His team comprises forty-five salespeople spread across the US, and twenty-seven of them were recruited in the last six months. The high recruitment rate compensated for the high attrition rate, of more than forty percent, and a recent expansion of the sales team. His existing team is not motivated enough and he is finding it difficult to retain them. Matthew and James shared their respective challenges in retaining and motivating their sales team. They both understand and acknowledge that salespeople need special skills to be good at their job.
When Matthew was Regional Sales Manager for the Northeast region at PE Appliances, there was a sales executive called Robert who was working from Virginia, and he was reporting to Matthew.
Five years ago, Matthew was the Regional Sales Manager for the Northeast region at PE Appliances. PE appliances use Excel to calculate sales commissions, which they continue to use to date. At the end of each month, every sales executive sends an email to the Finance team about the sales they achieved and the Finance team cross-checks the information with the invoices raised. PE Appliances pays sales commissions once in six months, so the monthly data is accumulated for six months and the sales commissions are paid at the end of this period.
During one such half-yearly commission calculation, a finance executive missed adding one month's commission for Robert, a sales executive who reports to Matthew. Robert didn't go over the details in his email about the commission payout as he was busy closing an important deal. After one month, when the commission was credited, Robert found a mismatch between his commission calculation and the commission credited to his account. He escalated this matter to Matthew via email, cc-ing the CFO. Without going over the details of Robert's email, the CFO replied that his team's calculations are always right, which led to a war of words and a heated exchange between Robert and the finance executive. Matthew traveled twice to Virginia to meet Robert and pacify him and put in that extra effort as it's very hard to find and retain good salespeople. It took a considerable amount of time for Matthew to get the problem resolved, however, it didn't help as Robert left the company within a few months.
Many talented people join sales as it is a high-paying job. If someone has good people skills, knows the art of selling, and is willing to put in hard work, they stand a good chance of earning a high salary. Sales commissions are one of the important reasons why many people choose to work in sales.
The job of a sales executive is challenging. They work late nights and weekends to be flexible in accommodating their customers. They handle rejections every day, which affects their mental health. They are ready to tackle all these challenges as they know that their commissions are worth the effort. They get demotivated when there is a lack of transparency, errors in calculations, or delayed commission payouts. 6 out of 10 salespeople would be motivated to leave their current company for better benefits. It is the responsibility of the organization to create a well-structured sales commission program to keep its sales team motivated and working tirelessly to grow its revenue and business.
An effective sales commission program is built on the following pillars:
When sales leaders create a sales commission program, they generally do it based on programs they implemented and found success with at previous companies they worked for. This one-size-fits-all approach often results in chaos.
The many ways how sales commission is calculated:
Some companies also consider revenue and margin numbers when calculating the sales commission. This practice can be fitted into any of the above 5 commission structures. Some companies also use a combination of the above 5 commission structures.
When we talk about a well-structured sales commission program, it must consider multiple nuances. If your sales team is spread across different geographies, like North America, Europe, and Southeast Asia, then Excel sheets or emails are not going to help. A one-size-fits-all approach will create more problems. Different geographies have different buying power, price points, and competitors. Other factors to consider are the longevity of the company and the brand.
- Subramanian Chandramouli
Matthew's search to create a better sales commission program ended when he attended a conference in New York. The theme of the conference was "High motivation leads to high performance". The keynote speaker at the conference spoke about creating a better sales commission program based on the RPC Framework. This framework is explained in detail below.
The buying power of companies or consumers in the state of Maryland (poverty rate of 9%) is much higher than that of the state of Mississippi (poverty rate of 18.5%). One commission program for the entire country doesn't make sense. This is especially true for countries like the US or Brazil. In each country, there is a region-specific wealth disparity. Selling a product in the US is very different from selling the same product in Europe. The sales cycles and the regional buying patterns may differ. Companies must do a thorough analysis of every region's buying power and state GDP before structuring the commission program.
Every company creates different products to suit different target customers. For example, a SaaS company creates different pricing plans for different versions of their product like Free, Growth, Pro, and Enterprise, with each one of them targeting different customer segments. A sales commission plan that is the same for all products will not motivate the salesperson. If the commission is higher for sales of the Enterprise version (where margins are higher) the salesperson will focus on selling more to enterprise customers, which is good for both the salesperson and the company. Going back to our story of PE Appliances, they manufacture premium and economical products, so they should consider a product-based commission structure.
The pricing of each product is designed keeping the customer segment in mind. Customers of Tesla are different from customers of Honda or Toyota. Additionally, Honda and Toyota manufacture and sell different cars for different customer segments.
Some companies focus only on creating premium products so they have just one customer segment. But they may have different use cases for different customers. Let's take the example of Apple, a premium consumer electronics brand. Their MacBook Pro is designed for professionals whereas the MacBook Air is designed for people who don't need high computing power. However, most companies focus on creating products for multiple customer segments. For example, Samsung has mobile products at various price points, clearly targeting multiple customer segments.
Sales commissions should be mapped to the customer segment the sales executive is focusing on. If a sales executive is selling only premium products, his/her commission plan should be completely different from a sales executive selling economical products. This helps in aptly motivating salespeople. After listening to the speaker, Matthew decided to implement the RPC framework for the sales commission program at PE Appliances. He also understood that the lack of an RPC framework-based sales commission program may be one of the reasons for the high attrition, a problem that his friend James is facing.
70% of sales directors believe that poor communication with their team negatively impacts team performance.
Many sales commission programs fail because they are not communicated effectively to sales executives. As we saw in the above example, John was shocked to see the mismatch in commission calculations. This recent problem, nudged Matthew to relook at the existing sales communication process and optimize it so that it improves the effectiveness of the sales commission program.
Some of the things he wants to factor in include:
The best way to improve communication is by choosing a channel that enables a facebook-like experience that people are already used to and by gamifying the sales commission process to keep it fun, engaging, and participative.
Human beings by nature love games. Historians have proof in Egyptian and Japanese cave paintings that games were played right from 10,000 BCE. Right from our childhood, we are used to playing games as they bring a competitive spirit within us. Today we have multiple software products that extend the game experience to sales commission programs. Companies can create milestone-based rewards using built-in game templates. Sales executives will love it as it is fun and easy to navigate, and helps them achieve their goals.
Benefits of using a gamified sales commission program
Some companies still use document-based sales commission programs as they believe that the current way of implementing the sales commission program is good enough, due to the lack of awareness. A manual, Excel-based commission program is prone to errors and is the biggest contributor to sales attrition.
When the sales commission program is designed and communicated using Word docs, Excel or PowerPoint there are some challenges that organizations may face. Some of them are:
Matthew is aware of the above challenges as he conducted extensive research on how to avoid these challenges and implement an unbiased sales commission program. He found out that smart sales leaders are using Incentive Compensation Management (ICM) platforms to modernize the sales commission process while fixing issues leading to sales demotivation and attrition.
Benefits of using an incentive compensation management platform:
Matthew has now eliminated most of the challenges he faced by creating and implementing the best sales commission program that effectively motivates his team. Matthew wants to motivate both his in-house and on-field sales teams. On-field sales teams are disengaged from the sales process so Matthew called for a 2-day team outing, where his in-house and on-field sales teams from across the country got together.
He used various games to improve connection and collaboration within his team and used these two days to communicate and introduce the software-based commission management process. At the end of two days, he found his team to be excited and positively looking forward to a more transparent commission program. Matthew heaved a sigh of relief seeing his highly motivated team as there are plenty of benefits for companies if they get sales motivation right.
Benefits of getting sales motivation right:
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