- Commission vs. bonus plans. As high-recurring revenue companies expand their go-to-market strategy, switching from a commission sales plans to a bonus formula plan can benefit the sales force and the company.
- Disadvantages of commission plans. Variability in incentive earnings, challenging quota-setting and lack of alignment for strategic goals can make commission plans tough to manage in high-volume growth organizations.
- Advantages of bonus formula plans. Less variability in incentive earnings, ability to tailor quotas and flexibility to build strategic aims into quota calculations can boost seller equity, fairness and retention in pursuit of company objectives.
Many companies face the challenge of transforming their go-to-market strategy as they grow from start-up to volume growth. One of the key elements of this transformation is the design of a sales incentive plan that aligns with the company’s goals and motivates the sales force.
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Traditionally, start-ups use a commission plan, which pays salespeople a percentage of their sales revenue. This type of plan rewards high performers and encourages salespeople to sell as much as possible. However, commission plans also have some drawbacks, such as:
- High variability in incentive earnings across salespeople in the same role, which can create dissatisfaction and turnover.
- Difficulty in setting fair and realistic quotas for different territories, which can lead to over- or under-payment of salespeople.
- Lack of alignment with strategic initiatives, such as cross-selling, upselling, or customer retention, which can affect the long-term growth and profitability of the company.
To overcome these challenges, many companies switch from a commission plan to a bonus formula plan, which pays salespeople a fixed percentage of their quota attainment, regardless of how much they sell. This means that salespeople earn the same bonus rate for reaching 100% of their quota, whether they sell $100,000 or $1 million. A bonus formula plan has several advantages, such as:
- Lower variability in incentive earnings across salespeople in the same role, which can improve seller equity and retention.
- Ability to tailor quotas to territories based on historical performance and market potential, which can ensure fair and achievable targets for salespeople.
- Flexibility to incorporate strategic objectives into the quota calculation, such as recurring revenue, customer satisfaction, or product mix, which can drive the desired behaviors and outcomes for the company.
One example of a company that successfully implemented a bonus formula plan is a life science and analytics instruments company that sells high-dollar value instruments and more transactional but recurring service, consumables and reagents products to pharma and biopharma research labs. The company had been using a commission plan for its sales force, but faced some issues, such as:
- Lack of focus by salespeople on recurring sales. It wanted to de-risk its business model by shifting revenue source from >90% instrument-led in the past to 50% instrument-led and the other 50% from recurring revenue in the future.
- High turnover rate among salespeople due to low and inconsistent earnings.
- Poor alignment with the company’s vision of becoming a trusted partner and advisor for its customers as sellers did not invest time after selling an instrument.
The company decided to switch to a bonus formula plan with the following features:
- A cost-neutral plan by making bonus pool equal to commissions paid in the past to ensure sellers did not perceive the switch as a cost-cutting exercise.
- A quota for each salesperson that is based on two components (performance measures):
- A primary quota focused on high-end instrument sales that reflects the historical performance and market potential of the territory.
- A recurring revenue quota that reflects the expected revenue from existing customers.
- Primary performance measure was set at 60% weight and recurring revenue performance measure was set at 40% to motivate sales salespeople mindshare to service, consumables and reagents sales.
The company provided intensive training and communication materials to educate and engage the sales force on the new plan. The results of the switch were positive and significant, such as:
- Reduced turnover rate among salespeople due to higher and more stable earnings.
- Increased customer loyalty and retention rate due to improved salespeople focus post-instrument sale.
The case study of this company demonstrates how switching from a commission plan to a bonus formula plan can benefit both the company and its salesforce. The approach and lessons are applicable to companies across other verticals, especially those with high recurring-revenue models such as most tech companies with XaaS models.
The bonus formula plan can help attract and retain talent, drive strategic initiatives, improve seller equity and reward outstanding performance. However, designing and implementing a bonus formula plan requires careful planning and execution. Companies should consider factors such as:
- The size and structure of their sales force.
- The nature and complexity of their products and services.
- The characteristics and preferences of their customers.
- The competitive landscape and industry trends.
- The availability and quality of their data.
By following best practices and seeking expert guidance, companies can successfully switch from commission to a bonus formula sales incentive plan and achieve their go-to-market transformation goals.
