Should sales commission be paid on margin or revenue?

Where salespeople negotiate price, commission should carry margin, because commission on revenue pays for volume at any price. Under a revenue plan, a discount costs the salesperson little and closes the deal sooner. A margin plan makes price part of the job, and it needs margin figures salespeople can see and trust.

What does a revenue commission make salespeople do?

It makes a discount the easy way to close a deal. The lowest sentence on the sales check's measures row reads: "Reps are measured on revenue, so the cheapest deal that closes is the right deal."

The salesperson is behaving as paid. A price cut trims the commission by the same share it trims revenue. It takes a larger share of the margin. On the pricing check, the lowest sentence on sales pay reads: "Sales pay ignores price: it rewards revenue, volume or the company result, so every discount that closes a deal is rational."

Revenue plans are easy to count and easy to explain. Where salespeople cannot move price, a revenue plan does less harm, because there is no discount to give.

Is margin on the scorecard enough?

Margin can sit on the scorecard and still pay nothing. The next sentence up on the pricing check reads: "Margin is on the sales scorecard, but a discounted deal pays the same bonus as a full-price one." The practice one step up puts price or margin into the incentive with real weight.

What does a margin commission need?

• Margin the salesperson can see before quoting. Current pricing with margin in front of the salesperson while they are with the customer.
• One source of margin everyone trusts. One agreed figure for realised price and margin by customer and product. A plan paid on a number nobody believes produces disputes.
• A margin that counts everything given away. If the plan counts invoice margin only, discounts move into terms, freight and rebates.
• Written crediting rules and a monthly statement. Salespeople can work out what a deal is worth to them, and what they have earned so far.

A plan can carry both. Revenue and margin sit side by side, so the measure that pays for volume has a partner that catches its side effect. The plan fits on one page, with three or fewer measures and a business hurdle. It is modelled on last year's deals before launch and changed no more than once a year.

The next step

The incentive plan tester draws your plan's payout line around target, with its steps marked, and shows what it costs. Run it before you change what the plan pays on. What reps are paid on is part of the sales check. The KPIs and incentives check covers bonus plans more widely.

No email before your result. No sales call after it. No list. Delete on request.

Related questions

• What are the stages of excellence in sales?
• Which KPIs should a business track, and which ones backfire?
• Who approves a discount when a deal is urgent?

This page is drawn from the pricing and sales checks' grids, the KPIs and incentives check's grid and the incentive plan tester on onestepright.