Unintended Consequences of 100% Commission - Part 3

When 100% Commission Leads To Loss of Control

You say you want the reps to sign up more new customers?  You say you want them to sell more product lines into every customer, as often this equates to more profitable business?  You say you need them to reach quota so the company can hit its earnings forecasts?  With a 100% commission plan…GOOD LUCK.  The rep is going to do only what they have to do to (1) not get fired, and (2) maximize the amount of money they are putting in their pocket for the least amount of work.  Usually this means securing a handful of good, big customers, who are repeat buyers and who can be put on autopilot.  This creates the security of “salary-like income” (called a phantom salary) and then leaves it to the rep to decide if he or she wants to hunt for new accounts, or negotiate for more profitable drops, etc. But, it’s no surprise that unless these activities directly benefit the reps’ income or their manager is screaming at them about it, it’s unlikely that they are going to give them much attention.  It’s just not logical or practical to do so.  They are simply doing what the incentive plan TELLS them to do.

One of the stated advantages of a commission only plan is the “entrepreneurial” aspect of it.  “It’s like the reps are running their own company!”  Say that again…but this time while thinking about company brand impact, legal risks, claims, paperwork requirements, etc.  Is it really a good thing to have a bunch of rogue reps out there running around doing whatever they like to maximize their own income?  Ok, Ok…I’m overstating a bit to emphasize as most companies in the space DO have very good training programs and management oversight.  But you have made their job considerably harder as the rep will constantly be pulled between what they are being told to do by management and what their financial needs dictate.

Charge Backs, Claw Backs, and Deductions…Oh My!

As Dorothy said about lions, tigers and bears in the Wizard of Oz, Charge Backs, Claw Backs and Deductions can be the bane of an otherwise happy journey down the yellow brick road of compensation.  When management has set up a pure economic deal with the sales rep (e.g., 5% of revenue) then anything that takes this deal out of balance needs to be accounted for.  In the F&B world, this mostly consists of returns, rebates, damage, and other circumstances where the transaction ended up generating less revenue or profit than it was originally credited as doing.  Yes, all of this is logical. But also, typically unnecessary.  Except for the most egregious cases, our work has indicated these adjustments account for very little in terms of shift in dollars from the company’s pocket to the sales rep pocket, but the goodwill damage to the sales force is enormous.  These deductions and adjustments create an adversarial relationship between the company and the rep…with one side fighting for all to be accounted for to the penny, and the other side giving all of the reasons why they shouldn’t be penalized for the negative event.

Once you have put a salary into play, the need to be “economically pure” goes out the window as you no longer have a fixed mathematical relationship between production and pay.  There is no need to be so precise on the incentive calculation as salary is typically not (and shouldn’t be) strictly a function of production.  This takes the pressure off, allows the big situations to be dealt with appropriately, and management to watch and correct for patterns of behavior in the small situations. 

50/50 Pay Mix To the Rescue

While there are certainly more challenges to the 100% commission model, these are the most prevalent and the most detrimental to a business’s economics.  As was stated in part 1, sales compensation best practices and our own research indicate that a 50/50 pay mix is the most variable to be considered (e.g., if target total comp is $100k, $50k is the salary and $50k is the target incentive).  Beyond this your reps tend to function in a very self-interested fashion and may take on some of the more unpleasant characteristics of time share or used car sales people (who are also typically on 100% commission plans).  Additionally, consider adding a salary component to your plan, add career levels, and some metrics that drive prospective strategic sales activities (new customers, more product lines) in addition to pure retrospective financial results. Always proceed with caution, but for many F&B companies the time has finally come where the economic and staffing costs of not-changing to a “salary plus” plan, outweigh the change management challenges that will come from making the change.

Unintended Consequences of 100% Commission - Part 2