Sales commission plans are a crucial part of a company's sales organization. They can be really complicated and difficult to get right. And for earlier stage companies they'll often change quite frequently. Managing this change can be really difficult as a sales leader has to balance several different components and several different stakeholders. Because of that, I think it's important to have a set of principles that guide the formation of your commission plan. I recently put these down on paper and thought I'd share them here.
- Commission plans should value and prioritize impact over individual compensation. While the best reps should be very highly paid, the goal of the plan is to benefit the entire organization as opposed to individual reps.
- Potential earnings from commissions should be competitive+ and commission should be a large percentage of overall compensation. The percentage will vary depending on the role in the organization. The closer the individual is to the actual transaction the higher the percent of compensation will come from commission.
- Commissions should be paid out to reps quickly to ensure that they can easily connect the value they've added to the business with the financial reward they receive.
- The plan should employ things like clawbacks and true-ups/down to reduce risk to the company when paying commissions ahead of cash collection.
- The plan should include consequences for customer churn and incentivize high-quality sales and smooth hand-offs.
- The plan should be fair so that there's an equal playing field across territories and customer segments.
- The plan should be iterative and updated regularly to ensure that it remains competitive and consistent with the principles above.