As we approach the start of 2017, many businesses will be planning their sales incentive plans or commission plans for next year.
When the objectives of such plans have been clearly thought through, they can play a constructive part in driving business growth and can also be an extremely effective tool in motivating a sales team and ensuring they are aligned to the wider goals of your business.
It is important to ensure that sufficient time and attention is dedicated to designing and drafting the plans. Nothing will demotivate a member of your sales team more quickly than telling them they will not be receiving the commission they are expecting because, for example, they have misunderstood the terms of the sales incentive plan. At best such conversations can result in a temporarily disgruntled employee but the consequences could be much more serious. Non-payment of commission could trigger claims for breach of contract or unlawful deductions. In the worst case an employee may resign and treat themselves as constructively dismissed. In such circumstances, they could argue that any post-termination restrictions which they had agreed in their employment contract fall away and cease to apply which could be a significant issue if sales employees move to a competitor or seek to solicit business from key clients.
What does a "good" plan look like?
This is not an area where one-size fits all. Each organisation will need to build the commission plan around its own business practices; for example, what works for an organisation where sales have a typical lead time of a number of months is unlikely to be appropriate for a shorter sales cycle.
That said, there are key considerations which all good plans should address. To mention a few:
- Targets – what targets are being set? Do they relate solely to the efforts of the participant or to their wider team? Which sales count towards targets? Are any excluded?
- Concept of "earned" – what conditions need to be met before commission is considered to be earned? For example, will it only earned once payment is received from the client?
- Entitlement to payment – when will payment of "earned" commission be made? Will it still be made even if the employee has left employment or working under notice of termination of employment?
You know what you mean, but does anyone else?
Many stakeholders from sales managers, finance, HR and potentially legal (depending on the size of your organisation) will have a view of what the plan should look like. While each group brings its own insight and experience, you should be wary of plans which lose clarity along that drafting journey. We frequently see duplication of concepts and contradictory wording. Where there is ambiguity in plans, this will often be interpreted in an employee's favour by courts in the case of disputes.
A definition section can be very helpful, particularly for acronym-heavy sectors. What might seem clear if you have worked in the industry for years may make no sense at all to new employees.
Many multi-national companies will want to use the same plan across various countries which present a number of challenges from a legal perspective. For example the ability to claw back payments may be viable in some countries but unlawful in others depending, in part, on whether commission is treated as "wages". Dealing with absence is also a thorny issue; many employers will want to limit participation in plan during periods of absence such as sickness absences and parental leave, but care should be taken to avoid falling foul of local discrimination laws.
In some countries, the commission plans will need to be translated into local language to be enforceable.
To get the most out of your plans, not only in terms of increased revenues but also in terms of employee engagement, you should:
Consider a training session for sales managers so everyone is starting with the same understanding of how the plan works. This is particularly important if the same plan is being used internationally where provisions are included which will not be enforceable in all countries.
- Leave sufficient time to consider the objectives and amend the plan. All too often, plans are being rushed through at the end of the first quarter of the financial year and insufficient time is given to reading the plan with a fresh pair of eyes to evaluate its clarity.
- Create as many certainties as possible and include mechanisms for dealing with disputes.