Commissions are meant to motivate sales people. Commissions are meant to establish an equilibrium between work effort and revenue. Commissions are meant to share the risk between sales people and the company. Commissions need to be a win, win. Understanding this, it amazes me how often we screw up commission structures.
I wrote a guest post on commissions for Fred Wilson last year. You can read it here, so I’m not going to rewrite that again. But, I am going to talk about commission alignment.
Alignment is when we pay or commission sales people on what we quota. Lack of alignment is when we commission sales people on one thing and quota on something else. I know, it sounds weird just writing it down. Why have a quota and not pay on it? Great question, but you’d be surprised how often it happens.
What does a mis-aligned commission structure look like?
Imagine a sales environment where quota was the number of new customers closed, BUT commission was paid on the revenue those customers created. Let’s say the quota is 10 new customers a month, but you get paid 10% of the revenue those customers bring in. What should the sales rep do? How is success defined in this scenario?
This lack of alignement creates a numer of challenges for both the sales person AND management.
- What should the sales person focus on?
- If they make quota, but the accounts aren’t creating the revenue they aren’t getting paid. That’s not good. What good is it to be at or about quota and not make any money?
- If they haven’t made quota, but the accounts they have sold are killing it, why keep trying to sell more accounts, that may or may not drive more revenue? The rep is making good money.
- What should the sales manager do?
- If a rep makes quota, but isn’t creating revenue, is that a successful rep? It’s nice they’ve made quota, but the company isn’t making any money.
- If they rep is driving tons revenue from only a small number of accounts, and not making quota, should they be fired? Does it makes sense to discipline someone making good money for the company if they aren’t making quota?
- How should ranking be determined? Who is the number one rep? The rep who exceeds quota or the rep who is driving the most revenue?
- How does the company plan?
- How can the company forecast? How does it know if it gets 10 new customers a month, how much revenue that will actually be?
- Where should it focus marketing and support dollars, on getting new customers or on getting more revenue out of existing customers?
- What happens if the sales team exceeds quota by 50% but revenue is down?
- What happens if the sales team is way off on new customers, but revenue is through the roof?
All these question are created when commissions and quota aren’t aligned. When sales people are paid on quota these problems don’t exist. A one to one environment exists. If the goal is to bring in more customers, quota AND pay on bringing in more customers. If the goal is to increase revenue, pay AND quota on revenue. If the goal is to improve margins pay AND quota on margins. If the goal is to introduce a new product or service, pay AND quota on sales of the new product.
It’s OK to quota and pay on multiple things, as long as it doesn’t get too complicated. But, it’s not OK to quota on one thing and pay on another. The only thing this accomplishes is schizophrenia and that’s not good for any sales team.