If you have been in sales and marketing for long enough, you might have come across a very popular quote from the father of advertising, David Ogilvy-” No sale, no commission. No commission, no eat”. Now that's how important sales commissions are for sales folks, at least in most cases. Equally important is the time you chose to pay out their commissions.
The commission-based sales compensation is obviously the best way to keep your sales teams motivated to overachieve their quotas, but do you pay them off immediately? Are there alternatives? Are there other factors that you as a sales leader should look at before deciding on an appropriate time to pay sales compensation? There is a lot more to this than meets the eye. In the sections that follow we take a look at the factors that you should consider before you pay sales compensation to your sales folks and the various payout models that you can choose from, depending on how your business is placed on those factors.
Your sales commission payout frequency should be decided to take into account the below-mentioned factors.
- Budget and Cashflow
- Sales team size
- Product or Service/subscription-based clientele
Now there are various models for paying sales compensation depending on many factors including the ones mentioned above. Let's explore
Paying Sales Commission at the time of booking
This is the most simple and the most obvious form of sales compensation particularly popular in small businesses. The goal is to use instant gratification to beat sales targets. While this is the simplest and the best way to pay sales compensation, it might not be feasible when your cash flow or budget does not allow such freedom. You obviously will have to have a healthy cash flow to be able to payout your sales teams as soon as the clients are booked. Also, the size of the sales team can weigh heavily on the cash flow. The bigger your sales team the greater pressure on your cash flow and the tighter it becomes to pay sales compensation to all your sales folks.
The one thing that businesses ought to be wary about in this model is the overpayment against actual sales. You might end up paying out more on sales commissions than the actual sales realized.
Paying sales compensation on invoice generation
Again this model of sales commission is great for small and medium scale enterprises, where you use instant gratification to keep your sales folks motivated. This can drive sales closures to a good extent but fails when it comes to cash flow. If you have a tight budget and limited cash flow you cannot sustain this sales compensation model for too long. While the payout on invoice generation does assure you relatively accurate commission payments.
Commission payout on the realization of the first payment
The prevalence of this model is often influenced by a significant customer churn rate. Customers might choose to opt out of a deal before making their initial payment or delay payments beyond agreed-upon timelines. The utilization of a commission cap in this model motivates sales personnel to ensure thorough and timely follow-ups, encouraging customers to fulfill at least the first payment installment. This commission structure also demonstrates effectiveness within service-based or subscription-oriented businesses.
Commission payout on receipt of full payment from the customer
This model of commission payout is most useful when your business is really tight on cash flow. Paying sales compensation from the earnings you make will not only allow you to maintain excellent cash flow, but it will also egg on your sales folks to ensure long term customer relationships. Any outstanding amounts will also be followed up by your sales folks. The other important benefit you get out of this model is that your sales team is in constant touch with the client, facilitated by the use of various sales collateral templates. A client relationship builds over time that provides for long-term business deals. The downside to this model is the lack of instant gratification for sales reps. Sales reps will have to invest time and effort into the deal until full payment is made. In the interest of business, many companies tend to follow this model.
No matter which model you choose to pay sales compensation to your sales folks, you will need a robust and transparent sales commission solution to be able to efficiently track and make accurate commission payments. With 65% of sales managers lamenting that the biggest challenge for them is the lack of time and resources to perform their job, it only accentuates the need for an intelligent sales commission solution.
Kennect offers you one such tech solution - Incentive Compensation Management-to tackle all your compensation-related issues no matter what commission payment model you use. It not only provides you with the necessary tools to handle compensation matters in a transparent and intelligent way, but it also works seamlessly with sales performance management tools to offer you a complete solution. Sales Performance Management from Kennect integrates seamlessly with ICM to ensure your sales folks focus on what they do the best for you, making the sale.
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