Are you wasting hard earned commission dollars?

By Dan Jensen, Jenkon

As one looks at the bottom line on a profit and loss statement, one quickly realizes the largest cost factor is for commissions. For many companies, this ranges between 30% to 50% of revenue. While executives search for ways to reduce expenses, "commissions" is seldom touched because it drives the motivation and loyalty of the representatives. Cut the commission check and representatives leave. Increase commissions, and representatives are more motivated (theoretically, at least), but the bottom line suffers dramatically.
The real question an executive should ask is not "how do we reduce our commission expense?", but rather "are we wasting any incentive dollars?". If there was an accurate way to measure it, I believe many companies would find they are wasting between 10% to 50% of each commission dollar. In other words, incentive money is being spent without any resulting behavior or effect.

Identifying wasted commission dollars

There are five basic objectives every compensation plan should include. These are:
  1. Sell product to end consumers (retailing)
  2. Build organizations (recruiting)
  3. Build Managers (people who train others to sell and recruit)
  4. Build Sales Leaders (people who train others to manage)
  5. Retention (keep them active)

Step 1 - Are you accomplishing the five basic objectives in a balanced manner?

As you look at your compensation plan, determine how well it accomplishes these fundamental objectives. Figure out where your plan is weak and where it's strong. For example, suppose you examine you plan and find that it offers very few incentives to retail product. Symptoms might include a representative with a garage full of inventory or one that must sell product to other representatives because they bought too much. Another symptom is a representative who focuses on recruiting but fails to train new recruits on how to sell your product. As you look at the plan, you may realize that your retail profit is poor (maybe only 20%) and that the presentation of the plan doesn't emphasize retail profits as part of the overall compensation system.
Try making a chart like the one below to see how each type of commission contributes to a particular desired behavior (your types of commissions may be different from my example):

Behaviors Retail
Profit		 GV
Bonus		 Break
-away		 Infinity Recruit
Bonus		 Total
Retailing320005
Recruiting042039
Build Managers024107
Build Leaders004509
Retention013408
Suppose your compensation plan had the five types of commissions listed above and assign a point value to your plan, from 1 to 5, based on how well each type of commission (top row) produces the five behaviors (first column). I've filled in some numbers in the table above as an example. Total your numbers to see how balanced your plan is and where both your weaknesses and your strengths are. Does your plan accomplishing all five basic objectives?

Step 2 - Is each type of commission obtaining a desired behavior?

Look at each component or type of compensation in your plan by itself and then ask yourself: "What kind of behavior does this type of commission encourage?" and "If this type of commission was removed, what behavior would stop occurring." For example, if you took away the retail profit, what would happen? The correct answer in this case is that sales would stop! If you eliminated your breakaway overrides (assuming you have them), would your leaders continue building other leaders and managers? Too many times, plans are designed to simply redistribute the sales dollar to others without any specific behavior expected. The result isn't as much a compensation plan as it is a form of "welfare" (no political message intended). Successful plans focus on behavior. Reward good representatives for good behavior and avoid rewarding them for undesirable behavior.

Step 3 - Are there any duplicated or overlapping behaviors being paid for?

Compensation plans usually have at least four types of commission incentives. If two or more types of commissions were being paid for the same type of behavior, wouldn't it make sense to combine them or eliminate one? Often it does.

Step 4 - Are there any "disincentives" in your plan?

As you look at each type of commission you pay and how that type of commission interacts with other types, you might find some conflicts or opposing forces at play. Eliminate them quickly.

Step 5 - Are you rewarding the non-producers?

If a representative fails to produce, what happens? Do they continue receiving compensation at the level of their performance? If not, you're rewarding nonperformance at the expense of the performers. What one man receives without working, another man works for without receiving.

Conclusion

Almost every plan has some area that can be improved and these areas are opportunities to add to your bottom line. While you may not need to reduce your commission expense, I can promise you that you will increase sales and profits by redirecting wasted commission dollars and strengthening the weaker areas of your plan.