Do you need to focus on target bonuses or commissions to motivate your sales teams and achieve the expected performance? Between the two possible incentive systems, your heart swings. Our advice to help you looking at the pros and cons ... and maybe find a third way combining all the benefits!
Sales vs target bonuses are progressing fast. More and more companies prefer to reward their sales teams in this way rather than with commissions. The arguments? Bonuses do not respond solely to turnover growth, but to employee performance. They can meet more qualitative requirements, which is developing in service companies where the customer relationship must be one of the priorities of everyone what the commission cannot offer. Beyond this simple explanation, the choice of one system rather than another is mainly a different strategy from the company. Let's see that in more detail.
NON-CEILING COMMISSIONS, A PRACTICE IN SALES
It is possible to provide variable compensation depending on the results, the commission. This can be indexed to turnover, quantity sold, gross margin, etc. It answers the principle "The more I sell, the more I earn". The commercial receives a percentage of the turnover, or the margin, that he has achieved and this linearly. The principle often applies from the first dollar sold. The commission is rarely capped, which can prove to be a incredible source of motivation for the commercial people.
This practice is often found in small companies. The commission has the advantage of being easy to implement and easy to understand by the sales teams. It can also be quite appropriate for sales lines, of any size, having a strong sales culture and in which sales representatives are entirely responsible for the sales act, without the intervention of other teams.
Companies choosing to remunerate their salespeople through commissions tend to prefer a relatively low fixed share (55 to 70% of total compensation, compared to an average of 70 to 75% observed in companies). The role of the fixed part is to remunerate the job itself. We can therefore consider that a salesperson must generate a minimum of sales for the good performance of his position which implies no commission from the first dollar of turnover. but to introduce a trigger. This partially avoids the redundant effect of commissioning which, after a few years, often creates rents for situations and bonuses acquired simply by exploiting a portfolio of well-known customers.
The commission system can be motivating because it allows the salesperson to truly increase his variable compensation. It is also closely linked to the strategic priorities of the company. The latter may increase or decrease commissions related to the sale of some products or services.
On the other hand, commissioning is not the best way to reward the effort and performance of achieving a given objective because it does not introduce a performance requirement at any time. The sales commission also has the disadvantage of being solely focused on quantitative objectives, which may not be entirely appropriate to the strategy of some companies.
SALES VS TARGET BONUS TO REWARD PERFORMANCE
The bonus overcomes the disadvantage of the commission by taking into account both quantitative and qualitative indicators. For example, customer satisfaction, customer conversion rate, prospecting for new customers, participation in the sales pitch of a new product. To be truly appreciated, these quality indicators must, however, be quantifiable. This can be a given percentage of satisfied customers or a minimum score, a minimum percentage of turnover made with new customers, a follow-up of the renewal rate of current customers, ….
The sales vs target bonus is also particularly suitable when the salesmen are not responsible for the act of sale as a whole and that they work together with other teams (technical support, engineers, customer service...) to complete the sale. This bonus makes it possible to better take into account the qualitative aspect of the commercial relationship.
The main benefit of this incentive compensation system though the commission is that the target bonus is based on the awarding of a target bonus to reach the target and a maximum bonus, which is a capped amount, when objectives are exceeded. The salesperson receives a bonus corresponding to a percentage of achievement of his objective, for example $700 corresponding to 102% achievement of the objective. It's really a bonus rewarding performance.
The disadvantage of the sales vs target bonu system is that your salespeople will be tempted to negotiate low objectives to be sure of achieving or exceeding them. To maintain its motivating character, the system of incentive compensation built with sales vs target must be selective without leaving too many employees outside the variable compensation, but also and take into account the various levers of motivation. It can also appear complex which often push the leaders when they have the choice between bonus on objective or commissioning to choose the commissioning, more easily to calculate.
THROUGH A MIXED SYSTEM BETWEEN TARGET BONUS OR COMMISSIONING: FOR THE BEST OF BOTH WORLDS!
You can also opt for a mixed system combining commission and target bonus, in order to benefit from these two types of incentive compensation. This is common practice in mid-size companies.
This can be for example a monthly variable paid on the turnover generated by your salesperson, to which we add quarterly or semi-annual bonuses allocated according to the achievement of qualitative objectives. The incentive compensation chosen may also differ according to the type of employee, depending on whether the main objective is to follow customers on a daily basis or to find new customers for example.
So, are you target-based bonus or commission or both?
