At Sales Resource Group, we believe that the question of when and how often to payout commission is dependent on a number of factors.
The first thing to take into consideration is your sales cycle. If you have a long sales cycle and you attempt to pay out commissions too quickly, you’ll find you end up with periods when your sales reps aren’t earning, which is far from motivational. But on the other hand, if there’s too long between a sales cycle closing and the rep receiving their commission, then you lose the instant gratification and motivation factor.
Next, consider the size of the payouts. While, as mentioned above, payouts soon after the close of a deal make the link between payment and performance clear, if the commission rate is low and the payouts are small, then the payout again loses its motivational lure.
Another thing to think about is whether you will pay out on deals closed or money received. For many companies, standard practice is to calculate commissions based on month-end receivables and then pay out the commission along with the following month’s pay. However, this can result in a long lag between the close of a deal and the rep seeing their financial reward. This can be demotivating and cause discontent amongst your reps. It can also cause them to shy away from long-standing customers who have a reputation for slow payment – again bad for business. Perhaps the worst scenario, however, is that by linking rewards to receivables, you are turning your salespeople into collection agents; taking their focus away from selling where it belongs and pushing them into accounts receivable!
On the other hand, if you cater to your reps’ preference and let them see pay for performance and immediate rewards there may be equally negative consequences. For example, in order to inflate their commission, some reps may push bad contracts through. Not only is this an expensive waste of time for your AR department, it results in a poor customer experience and may result in a lost customer.
One way to strike a balance between these two scenarios is to have instant rewards but also instant penalties – with no exceptions. For example, the rep receives their commission upon the closing of the deal, but your company puts a policy in place to recoup this commission after a set amount of time if payment is not made for any reason. Bear in mind, however, that this is by no means a perfect solution. All reps encounter bad luck sometimes, and a rep’s deal can go bad through no fault of their own. You must consider whether you want to be in the position of your reps owing you money and all the negative feelings this may imbue.
As you can see from the above, the answer to just when and how often you should be paying out commissions will be different from sales team to sales team and you must structure your sales compensation plan strategically to suit your particular business’ needs. Whatever the case, it’s important that you have a clear and simple written policy that is understood and agreed to by all your reps. Under no circumstances do you want the situation to arise where your reps feel cheated – if this happens, you will most certainly lose them.
Contact us today to see how we can help you get the right commission and sales compensation structure for your company.