Sales commission – Turnover, value-added or contribution?

Knowing how to motivate and reward staff for the benefit of the company as a whole comes down to recognising three key factors: turnover, value added (profit) and contribution.

Many companies use sales incentives based purely on the business their representatives bring in. For example, Sales Rep A brings in £10,000 of business within a set period and is rewarded with 5% commission – or £500. It’s easy to calculate, and easy for Sales Rep A to recognise that attracting new business leads to reward. But this simplicity can be commercially damaging. Sales Rep A might take the view that nothing else matters except making a sale, pressurising customers into a deal that’s not right for them, harming customer retention and long-term prospects. Furthermore, if that new business creates only £500 profit for your company, you’ve just given all of it away.

Another formula for commission is based on the value added figure. Once all deductions have been made and the profit of the newly won business has been worked out, Sales Rep B might receive a 10% share of this profit. Basing the share on the contribution to the profitability of your company takes into account the ‘bigger picture’, but it does have pitfalls. Sales Rep B may feel they are only rewarded with a fraction of their hard-won business – while you take the lion’s share. And because it’s virtually impossible for Sales Rep B to calculate whether they’ll receive £1 or £1,000 during the vital stages of negotiation, they may not push so hard to wrap up the deal.

Commissioning schemes based on ‘contribution’ tend to be a fairer and commercially sensible option, taking into account business targets and key performance indicators. The ‘contribution’ Sales Rep C makes might include the value added by their new business, customer satisfaction based on a scorecard survey, or repeat business generated through the new lead. While the quality and retention of this incoming business tends to be higher, a similar issue can arise as before: Sales Rep C may struggle to identify the level of their bonus at the time it matters, and therefore lack the drive to secure the deal.

So what is the best way to reward and motivate staff? There’s no doubt that any scheme should put your business first by being based on profit, not turnover. And ‘contribution’ factors should also be taken into account.

In my experience, the best and most cost-effective way to overcome the motivation hurdle is to use good, old-fashioned, heart-felt praise. Underused sentiments such as ‘thank you’ can be worth a fortune to your business in terms of motivation and staff retention. Gratitude can be verbal, or in the form of a written note or letter sent to the employee’s home. Sales Rep D might not have been able to work out exactly how much their latest negotiation was earning them at the time. But knowing that they were winning your admiration was just as likely to have clinched the deal.