Sales Ops
9 min read

When should you change your sales commission plan?

Find out when it's time to change or modify your sales commission plan, and how to adjust it for the right reason!

Antoine Fort
Antoine Fort
CEO @Qobra
January 27, 2023
When should you change your sales commission plan?
"There's no mystery about it, a good variable pay plan drastically impacts retention, motivation and performance."

Vladimir Ionesco, Director of Global Sales Performance at Doctolib

As a business leader, a sales manager, operations manager, finance manager or HR manager, it is not easy to question sales compensation, especially when you feel it is working well. However, the company may be far from reality...

According to a Primeum study : how to remunerate, 88% of respondents think that their company's sales commission system should be improved.

To protect against this risk, there are many moments or facts that can alert the company to the proper functioning of its commissioning plan(s)! What are they? 

In this article, Qobra's experts reveal them to you and give you the steps to take to rectify the situation!

1. Evolution of the stage of development of the enterprise

Depending on the stage of growth of the company, the sales teams do not have the same objectives to meet, which will drastically impact the commission plans. 

In fact, at the beginning, a company aims to grow, to conquer a market, and the commission of sales representatives will therefore be mainly focused on the acquisition of new customers. On the other hand, an established company will seek to retain its customers, or even to make additional and/or supplementary sales, as is the case for Doctolib, for example.

"Now, as Doctolib grows, as we mature, our strategic challenges are different. At the moment, one of our major focuses is upsell and customer satisfaction. We are therefore in the process of defining the associated variable pay model. This notion of alignment between the bonus and desired behaviours and the strategic plan is obvious."

Vladimir Ionesco, Director of Global Sales Performance at Doctolib

In concrete terms, each company must have a specific commission pay plan for :

  • The customer acquisition phase
  • The customer loyalty phase 
  • The sustainable growth phase.

Customer acquisition phase

At this stage, the objective for the company is to acquire new customers quickly.

For example, at Hubspot, at this stage of development, they were paying their sales people double the amount of monthly recurring revenue that a customer brought in. In other words, each salesperson was paid $2 if a customer paid $1 per month. However, if a customer dropped out after 4 months, Hubspot would get back the commissions paid to their sales people. In this way, they protected their cash flow and ensured that their salespeople were selling the solution to prospects who had a real interest in it.

According to Hubspot, thanks to this commission plan, they had 1,000 new customers in less than 6 months.

Customer retention phase

In order to build customer loyalty, the company must first understand why some of its customers do not stay and analyse these reasons in depth. Is it the product? Customer support? The price?

Taking Hubspot as an example, after observing a high churn rate, they studied the work of each of their Customer Success Managers in order to detect which were the best and thus be able to spread their methods and good practices to others. However, none of them really stood out. So they decided to look at the churn rates of the different sales reps. They noticed a more than 10-fold difference between the lowest and highest churn rates among sales reps. 

To solve the problem, Hubspot implemented a new commission pay plan, drewarding salespeople with the best retention rate: 

  • The 25% with the highest retention rate now received $4 for every $1 of monthly recurring revenue, a 2-fold increase in commission.
  • The next 25% received $3 for every $1 of monthly recurring revenue, a 50% increase in commissions.
  • The next 25% received $2 for every $1 of monthly recurring income, the same as before.
  • The next 25% received $1 for every $1 of monthly recurring revenue, i.e. a commission divided by 2.

In this way, sales staff were more motivated to focus on the expectations of their prospects before turning them into customers. They made sure that the product really matched their expectations. In the end, 6 months after the implementation of this new commission plan, the customer churn rate had dropped by 70%. 

Sustainable growth phase

At this stage, it is about growing the business profitably. So it's a question of mixing rapid acquisition with customer retention.

The aim is therefore to get salespeople to sign up customers who will make a real investment in time, energy and money to learn how to use the product and/or service sold by the company.

Again, using Hubspot as an example, they found that customers who paid by the year were more profitable and loyal than customers who paid by the month. 

So to encourage the sales staff to develop this category of customer, each sales person was paid the full commission if the customer committed to paying for the year. For customers who paid by the month, the salesperson received 50% of his or her commission at the end of the first month, 25% at the end of the sixth month, and 25% at the end of the 12th month.

In this way, a salesperson was more motivated to sign a customer with an annual contract rather than a monthly one. In this way, the salesperson received his commission directly instead of waiting a full year to receive it in full.

As a result of the new commission plan, the average payment period for customers has increased from 2.5 months to 7 months.

2. Evolution of the market maturity stage

In addition to the stage of maturity of the company, it is also necessary to remain vigilant to the stage of maturity of the market as a whole. 

Logically, entering a competitive market, or seeing it grow, will impact the formula for calculating commissions for CSM or sales teams.

Indeed, it will be all the more difficult to win in a market with multiple competitors. The teams receiving commissions must therefore redouble their efforts to sell their product(s) and/or service(s) and thus be encouraged to make a difference. Ultimately, this may result in a higher commission remuneration share, for example.

3. Change in the company's business strategy 

It is essential that a company's sales commission policy is aligned with its overall business strategy. From the marketing of a new product(s) and/or service(s) to the entry into a new geographical market, through to a change in business model, it is essential that this new direction be taken into account in the calculation of commissions.

The change of business model

As a result of a strategic decision, a market fact or a legal obligation, changing the business model is nowadays more and more common. 

This is a very important event for sales teams as their sales strategy is set to evolve, and to support them, the company must redesign its commission model. Otherwise, the company cannot succeed in transforming its business, and it also risks failing to retain its teams and motivate them to achieve their objectives.

As an example, a company moving from a traditional sales model to a monthly subscription package for its product and/or service needs to completely revise its sales commission plan (performance indicators, weight of contract renewal versus new customer acquisition, etc.). 

New product(s) and/or service(s) offer

"At Spendesk, at the beginning of the year, in the first half of the year, we really had a strategy where we were implementing new pricing, packaging on our customer base. And so our Customer Success Managers had a plan that was really focused on this. Then, in the second half of the year, we decided to review the plan and readjust the weight of the plan a little to focus more on usage and, as a result, the use of these famous new packages in our customer base."

Aude Cadiot, Revenue Operations Lead at Spendesk

Like Spendesk, many companies are facing this stage: the development of their commercial offer. This may be the integration of a new product or a consulting or support service.

The company's objective is to develop this new offering, and to achieve this, it is essential that it focuses commissioning on this new product and/or service to ensure that it is successful with its targets. Whether this means developing new performance indicators for the new product and/or service or redesigning the current commission plan(s), it is important that these changes are in place for a defined period. 

Then, depending on the company's strategy for this new business offering, the sales commission plans can be reviewed over time until sales have grown to the point where it becomes a mainstream product and/or service within the company's entire offering.

By doing so, the company also ensures that the commissioned population is motivated to become knowledgeable about the product and/or service in order to better sell it to their customers and/or prospects.

New geographical markets

Another situation that is common to many companies is international development.

Thus, in the situation where the same sales staff are responsible for acquiring new customers in these new countries as in the company's country of origin, it is essential to encourage them to develop this new geographical area by offering more interesting commissions for these contracts. Otherwise, apart from personal satisfaction, they have no interest in discovering the culture, functioning, barriers to entry, etc. of a new market. 

On the other hand, there is no need to set up larger commissions, accelerators or review performance indicators if the company creates sales positions dedicated to the development of one or more countries.     

The sale of products and/or services with a high commercial margin

The objective of a business is to make a profit, or at least for profit-making businesses. It is therefore in their interest to sell the product(s) and/or service(s) that make(s) the largest commercial margin.

To do this, it is therefore interesting to commission the product(s) and/or service(s) sold differently depending on what they bring in for the company, for example through bonus accelerators.

Otherwise, salespeople sell what they know how to sell, what they like to sell, or what their customer(s) and/or prospect(s) ask for. 

4. Deterioration of the economic situation of the company or its market

Reviewing a sales commission plan is not necessarily synonymous with business development. Indeed, in some situations, this action is carried out in order to deal with the economic situation of the company or its market. A situation that many companies faced during the covid-19 period. 

When it is an exogenous cause, it is important to protect sales staff from the consequences, especially those with a large commission part, by temporarily increasing their fixed salary. In this way, they remain motivated and willing to remain loyal to their company. 

Conversely, this manoeuvre is not necessarily appropriate in a difficult economic context specific to the company, particularly if this is the result of poor performance on the part of sales staff. 

On the other hand, in the situation of a budget overrun due to too high commission payments, it means that the commission plans have been badly defined and calibrated. To reduce the risk of budget overruns, the cost of customer acquisition should be (re)calculated to ensure that the variable pay plans are consistent.

5. High turnover and lack of attractiveness

The sales profession is the one where turnover is one of the highest in France. According to INSEE, the average turnover rate is 15%, and it even exceeds 50% for prospecting jobs.

There are several reasons for this, but sales commission pay is one of the top 5 causes of sales turnover

Although the reasons may be different, it is important to look first at populations with high turnover. For example, a turnover of top salespeople may mean that commission plans are not in their favour. Conversely, a high turnover of newcomers may mean that targets are difficult to achieve.

Finally, a general turnover, but also a difficulty in recruiting, is synonymous with a lack of attractiveness of the commission pay scheme(s).

To deal with the situation, the first action to be taken by the company is therefore to confront its teams on the subject, but also to carry out several benchmarks with companies of the same size and in the same sector, or to approach a consultancy firm specialising in this area to redesign the commissioning plans.

6. Decline in commercial performance

The main alert for those in charge of commissions in their company is the level of sales performance. A lack of sales performance is a worrying sign about the ability of their commission plans to generate motivation and performance.

Of course, we are talking here about a homogeneous decline in sales performance among all members of the sales team.

There may be many reasons for this, and they need to be studied carefully in order to act accordingly:

  • Unrealistic targets
  • Uninspiring commissions
  • Objectives not in line with the market, the company's business model or the economic context
  • Lack of visibility and transparency on commissions
  • ...

Although there are many ways to improve sales performance, a common obstacle for many companies is that they manage commissions with Excel. A tool that is less than optimal for making commissions a real lever for sales performance.

As proof of this, according to a Qobra & Modjo study on variable compensation in France, 61.9% of employees using commission calculation and management software exceeded their targets in 2022, compared with just 30.1% of those using Excel or Google Sheets.

"With Excel, there is a grey area that is created where in fact you are not really sure that the commission model and the bonus are being applied, which raises a real question of post performance evaluation versus motivation."

Vladimir Ionesco, Director of Global Sales Performance at Doctolib

Firstly, and regardless of their knowledge of the subject, it is the responsibility of the management, sales, operations, finance or HR teams to build or redesign the commission pay plans (rules, targets, pay amounts, bonus accelerators, etc.). Secondly, with Excel, these teams have no feedback on the relevance of their commission plans, so it is very difficult to identify the best performing compensation plan(s) through detailed reporting.

"Before Qobra, there was a clear inability to fully track the link between performance and bonus, and therefore to make, and operate on, the right operational and commercial decisions."

Vladimir Ionesco, Director of Global Sales Performance at Doctolib
🛠 The practical tool

During implementation, Qobra's teams personally guide each company in setting up or reviewing commission plans to ensure their relevance before deployment. Then, from the platform, it is possible for managers to generate a report in one click (key KPIs, team performance, commission amounts, etc.).
Dashboard Qobra

7. Change of corporate culture

In recent years there has been a real cult of companies identifying their own culture and making it recognisable to all. 

A mark of differentiation that can represent a real opportunity from a business perspective. However, for this culture to be sold by the sales teams, it needs to be reflected in their commission plan(s).

For example, a company that wishes to emphasize its added value on the support it provides to its customers must modify its commission plan(s) accordingly, for example through post-sale customer satisfaction rate objectives.

8. No communication on commissions topic

Commission pay is a subject that motivates salespeople, and in addition to producing a collective emulation and general motivation, it must be at the centre of discussions. If it is not, this may mean that it is not sufficiently motivating or, worse, that it is not understood by its beneficiaries.

According to a Gartner study, only 24% of salespeople can easily calculate their total commission pay.

Moreover, if even managers do not talk about commission pay, then there is a good chance that they will not be able to talk about it because they themselves do not understand how it works. At this point, it is up to them to review it so that it is understood by all.

9. Common errors in the calculation of commissions

As mentioned earlier, most companies still use Excel to manage their commission plans. The solution has more than 750 million users worldwide, and for good reason, it is often implemented as standard in most companies. This is probably the reason why these same companies use it to calculate commission pay.

Simple to use and easy to set up at first sight, it is nevertheless recurrent that Excel files contain errors. In fact, according to some studies, more than 90% of Excel spreadsheets contain errors.

"With Excel, there were some unexplained differences between the theoretical amount of commissions and the actual amount. With Qobra, we were able to solve this problem."

Vladimir Ionesco, Director of Global Sales Performance at Doctolib

Mistakes that can be costly to the company in human and financial terms. Indeed, by paying higher or lower commission amounts than the real amount, the company causes either a financial loss or great frustration among the beneficiaries, which will have an impact on their motivation, performance and retention. In this regard, according to a Primeum, comment-remunerer.com and MeteoJob study, 46% of company executives and sales managers believe that their scheme is not likely to retain the best talent.

🛠 The practical tool

With Qobra, companies no longer need to ensure that all the cells in a column are correct. As soon as there is an error in a formula, it is reported by the tool. In addition, all beneficiaries of commission pay have access to the calculation formulas, so if they spot an error, they can report it directly on the platform to their manager.
Qobra commission error
"With Qobra, there is no potential discussion around calculation errors."

Pierre-Gaël Pasquiou, Chief Sales Officer at Welcome to the Jungle

The final word...

As we have seen previously, there are many reasons why a commission pay plan should evolve, so it is important to be alert to the directions the company is taking, the behaviour of the market, the economy as a whole, the movements of the sales team, their performance, etc. 

To do this, it may be worthwhile to schedule regular meetings to evaluate all the points raised in this article and to act accordingly.

Depending on the degree of challenge, the company does not have to review all of its commission pay plan(s), on the contrary, as some companies such as Doctolib or Spendesk have explained to us, it may be appropriate to review some of the variables of the commission plan(s). Changes that are also easier to manage from a legal point of view, in other words, a less cumbersome process for the sales, HR and finance teams.

"We try to create a variable remuneration plan that we try to keep over the year, to really keep stability for the employees and precisely use what we call Spiffs, i.e. bonuses, a little bit on an ad hoc basis, small ad hoc plans that will give, that will be a little bit of a focus over the year."

Aude Cadiot, Revenue Operations Lead at Spendesk
"At Doctolib, we both change often and we don't change at all. In fact, we have to distinguish the model from the parameters. Doctolib's bonus model for 80% of our salespeople has been the same for eight years. The parameters, starting with the objectives, change regularly."

Vladimir Ionesco, Director of Global Sales Performance at Doctolib

On the other hand, in case of modification of the variable commissions plan, there are legal obligations to follow.

Sommaire

Antoine Fort
Antoine Fort
CEO @Qobra
January 27, 2023