Commission Structures – the good, bad and the ugly.
One thing I’ve learned after working with sales teams for more than 20 years is that commission structures create as many problems as they solve. People often talk about them as if there’s one perfect answer, but there really isn’t. What works brilliantly in one business can quietly undermine another.
At its simplest, commission should reward the behaviour you want more of. That’s the bit a lot of companies get wrong.
If you want fast, high volume closing, then you can design a structure that encourages exactly that. If you want people to build long term, higher value client relationships, the commission needs to reflect that too. You get what you pay for, and people follow whatever the structure nudges them toward.
Can You Pay Salespeople Too Much?
Another thing I have seen is businesses paying top tier commissions to salespeople who are really only responsible for a portion of the sales process. If your marketing team is generating all the leads and your salesperson is “just closing”, should they be paid the same as someone who is responsible for full business development? In my view, you should only pay for the job they are actually doing. Commission should reflect responsibility, not assumption.
Then there’s the classic 1/3 model. A lot of traditional sales organisations operate on the idea that a sale has three equal parts: one third goes to cover operational expenses, one third is retained as profit, and one third is paid to the salesperson. This assumes you already have the salesperson’s base salary covered. If you don’t, that’s a bigger problem because you are effectively using commission to subsidise your cost to serve, which is not sustainable.
I have also seen the other side of the equation. You can remunerate someone so well that they become comfortable, even happy, but the business no longer benefits from their success. It sounds strange, but you can genuinely pay someone too well. The salesperson is thrilled, the business is not, and no one can quite figure out why the numbers do not feel right.
Building Sustainable Commission Plans
Whenever I look at commission structures, new or existing, I always model out three scenarios:
- low performance
- medium performance
- high performance
At low performance, it should not work well for the salesperson, but it should at least be positive or break even for the business. And even then, what is the point of break even?
Low performance should always be temporary. Medium and high performance are where the structure needs to start feeling rewarding for both sides and financially healthy for the company.
I have been lucky to work with some incredible salespeople over the years. When it works, it really works. They earned great money, the business performs well, and it feels like a genuine win-win.
But it is a fine line, and it is very easy to get wrong. Commission is a powerful lever, but it needs constant checking to make sure it still reflects what the business needs and how the market has shifted.
I hope this helps – it’s an area that can be very grey, but when you get it right and drive the right motivators for your team – the results are amazing.