Sales Commission Plan

The objective of every Sales Commission Plan is to give you a straightforward way to incentivise and reward your salespeople based on how they have performed. Here we introduce a very flexible and practical approach, the DSCP, which calculates the commissions for all the network nodes, based on their:

• Performance (or the Overall Performance Indicator if you use the DINAMIS application)
• Sales magnitude (or the Sales credits if you use the DINAMIS application)

with the weights of your choice.

It is a relative SCP in the sense that the calculated commission for each node, is relevant not only to its own OPI and sales credits, but also on the OPI and sales credits of all the other network nodes in the same hierarchy level. This approach has its pros and cons as opposed to an absolute SCP, which is more straightforward but much less flexible. We have a few notes on that later on.

The DSCP is very easy to use, so let us demonstrate how it works through the following example, where we assume a three-level network hierarchy:

Hierarchy Level	Headcount
Network Director	1
Area managers	5
Sales reps	20

Network commission

The first thing you do is to set a commission range for the entire network and under which conditions it will be rewarded. In the simplest of ways:

Minimum commission	Required OPI	Maximum commission	Required OPI
$ 240,000	90%	$ 440,000	120%

This means that the network performance (OPI) must reach 90% for the beneficiaries in all hierarchy levels to be rewarded a total amount of $ 240,000. On the other hand, the maximum of $ 440,000 will be allocated if the performance reaches 120%. For intermediate cases, a simple method of three is applied.

We assume for the moment that our exercise takes place by the end of the year, where we consider an annual network performance of 96% resulting in a $ 280,000 commission.

Allocation per hierarchy level

The second thing that you must set, is how the network commission will split at hierarchy levels. It is completely up to you to determine the commission share for each level and you should consider the base salary of each level, its responsibilities and of course, its headcount. For our example, we choose the following arbitrary shares to allocate the $ 280,000:

Hierarchy Level	Level share (%)	Level commission	Commission per head (if all succeed)
Network Director	15	42,000	42,000
Area managers	25	70,000	14,000
Sales reps	60	168,000	8,400
	100	280,000

Allocation per network node

We have the commission per hierarchy level, so the next task is to allocate the commission within each level. Actually there is nothing else for you to do, except that to optionally set the two following parameters, for each level:

• Maximum commission (optional): If not set, this could result (depending on the figures), to someone getting a $ 30 commission. You wouldn’t want that, so set a reasonable amount.
• Maximum commission (optional): The same is true for the upper end. Are you sure you have set the quotas right, or someone has reached a 500% OPI, effortlessly? Protect yourselves by also setting a reasonable amount.

To illustrate the above for our five Area Managers, we do not initially set the optional parameters. Based on that, we get three Area Managers to be rewarded with a total of $70,000 commission:

• Column A: The deviation of each beneficiary’s performance from the minimum performance (90% in our example)
• Column B: The ratio of this deviation to the sum of the deviations

In simple words, for our three beneficiaries, the sum of their deviations equals 41.64%. John’s share in this sum is 64.05%, so John will be rewarded with the 64.05% of the commission for all the Area Managers. Ha has performed much better, as far as the OPI is concerned.

Look however at Emily’s figures. Her sales credits account for about 63% of all the Area Managers but she’s only been rewarded with a $ 13,610 commission. Compare that to John’s figures and commission. If you are 100% confident that you have set the proper quotas to each Area Manager, then there is really nothing that you should change. John deserves a much higher commission, because he did perform much better. This is rarely the case however, so if you have any doubts, then we strongly suggest that you use our safe mechanism, where the commissions are not calculated solely based on the OPI (performance) but also on the sales credits (magnitude). Similarly:

• Column C: The share of each Area Manager’s sales credits to the overall sales credits
• Column D: The ratio of this share to the sum of the shares

You weigh these two factors as you wish to calculate the final commission. In our example we have chosen a 60% – 40% ratio in favour of the OPI factor. Compare how John’s and Emily’s commissions have changed. Where you to favour even more the sales credits factor, you would have been rewarding a much greater commission to Emily, getting a step closer to what an absolute SCP would do (she sells the most, she gets the most).

NOTE: You could have used a maximum commission to limit what is rewarded to John. This would have lead to a smaller overall commission for all the Area Managers, but we still want to allocate $70,000. It is not described here, but within the DINAMIS application, every time you set a minimum or maximum commission, this re-allocation to all the others Sales Managers is done automatically, so that the overall commission always remains at $ 70,000.

 

Let’s sum up

• The DSCP is a relative Sales Commission Plan, in the sense that the commissions are calculated based on the comparison of each network node to the other nodes in the same hierarchy level. This acts as a safe mechanism. You can’t always predict how the market and your network will perform, so the commissions are calculated based on how everyone has performed. This however presents a drawback: your salespeople cannot know how much they will be rewarded eventually. You can provide them with monthly snapshots, but the actual figures will be known after the targeting period has ended.
• The DSCP is very flexible:
  • You initially set the prerequisites for when and how much an overall network commission will be rewarded.
  • You freely distribute this overall commission to the hierarchy levels
  • You set optional minimum and maximum commissions per network level
  • You adjust the weights that calculate the commissions based on the performance (OPI) and magnitude (sales credits) of the network nodes. This is probably the strongest point of this plan because it adopts  to your strategy and know-how:
    • Are you very confident about your Quota Allocation Models? Increase the OPI weight.
    • Are you at the early steps of building QAMs or you just set quotas by hand? Play safe and reward those that bring you the highest revenue (seen via the sales credits).
    • As a safety net however, we always suggest that you do set a reasonable weight to the sales credits factor.

 

How DINAMIS implements the DSCP

• DINAMIS implements the DSCP in a very straightforward way that enables you play around effortlessly, Every time you change one of the few parameters, everything is recalculated automatically.
• It also assumes that the commissions will be rewarded by the end of the year. Any time however that you feel ready to start communicating your plan to your network, just select to embed it in the sales report (coming soon). Even if the year has not ended, DINAMIS will project the OPI based on the number of remaining months.
• Very soon, DINAMIS will be complemented a version of this SCP that rewards commissions on a quarter basis by using hold back payments

Sales Commission Plan report

The figure below displays the report produced for the DSCP by DINAMIS. Check here for a detailed description.