Pure Commission Plans Are Actually Very Restrictive
This may seem like an odd statement, as many sales leaders think of commission plans as the most unrestricted of plans for the sales reps. They can sell what they want, how and when they want, right? So how could a commission plan be restrictive? It’s restrictive in terms of what it allows management to do (or not do) in terms of directing behavior and in terms of plan administration.
First, since this approach means 100% of the employee pay is coming through variable pay, this pay must be paid (at least in the most part) weekly or bi-weekly (as would a normal salary check) so the reps can pay their monthly household bills. This greatly reduces the choices that management has for calculating incentive pay in any kind of aggregate or goal-driven fashion and reduces the payout to mostly at a transaction level (commonly done on a “per drop” basis for the value of each sale or delivery). Goal attainment, profitability metrics, customer penetration, or new customer acquisition rewards become tricky under these schemes and often are addressed through complex additions, modifiers or claw backs. We have seen some plans that have 8 or 9 different metrics on top of the core commission plan that delivered 70% of the employees pay. Relative to the commission, these elements become more annoyances than anything else and cannot compete with the attention and focus the commission drives to the single transaction level.
Second, pure commission makes make moving accounts or territories a living nightmare. Every company we have dealt with struggles with this problem. Under a pure commission plan when one account moves from Rep A to Rep B, Rep A loses money and Rep B gains money. This is just the math of how commission plans work. To combat this inherent inequity, companies come up with complex adjustment or transition schemes that either add fixed pay to compensate for a lost account or reduce the amount of pay generated from a new account inherited. As it’s quite common to adjust territories in the F&B industry, this can amount to the practical elimination of the “pure commission” plan for a big portion of the sales force at any given moment in time. This makes you wonder if the “pure commission” approach is really having the impact that management thinks it’s having, when so many of the sales force are really under transition pay and, in effect, getting fixed compensation.
Lack of Career Path, Lack of Bench Development for Management
By definition, a 100% commission plan has no salary component and therefore no opportunity for annual salary increases based on job performance. There is also no opportunity for salary increases from promotion to a higher level of sales rep as these levels don’t typically exist. This can be a detriment to the retention of top and mid-level performers as most humans look for positive feedback from a variety of sources – not just their pocketbook.
Further, sales leaders usually start out as sales reps but a lucrative 100% commission plan does not provide a smooth transition to a more typical management compensation plan which is usually much more salary heavy with quarterly or annual bonuses. The swing can be too extreme both in amount of pay and frequency of pay. Additionally, it’s not unusual for top reps to earn more than managers in a given year, but 100% commission plans, with their tendency to create phantom salaries, can make this a consistent year over year problem so the rep never sees a benefit from moving into management.