What payment structure is often used to motivate employees to perform more services thereby increasing their productivity?

© GettyImages
Stanth

Set fair and realistic targets to motivate and reward.

Paying on commission is a no-brainer, right? Reward people for making sales, closing deals, or hitting targets – it makes sense. Unfortunately, it's not quite so simple.

Consider what happens when jealousy creeps in. Maybe a star performer consistently outperforms (and out-earns) their teammates, with the result that team morale plummets and total team output falls. What if the relentless pursuit of sealing deals results in aggressive selling tactics that erode your organization's reputation?

Managing people on commission-based pay can be challenging, especially when it results in their earnings becoming unpredictable. But handled well, it can be an effective way to get the most from a team.

In this article, we'll explain some of the different types of commission, the advantages and disadvantages of this pay structure, and how you can get the best from your commission-based team.

What Is Commission-Based Pay?

Commission is a form of variable pay that is based on team members' performance. They can earn either a "flat" commission (usually a percentage of the sales that they generate) or a "ramped" commission (pay rises with each target that they meet).

Many companies pay a low basic salary plus an attractive commission. This allows team members to cover their living expenses, but also encourages them to put in extra effort to increase their earnings. As such, commission schemes can act as a great incentive to your team to meet, and exceed, its targets.

Performance-related pay structures are typically used in sales roles, which are often heavily target-driven. They allow star performers to earn much more than their colleagues from other departments who are on "regular" incomes and fellow team members who don't perform as well.

The level of commission varies depending on the role, company and industry sector. It can account for only a small percentage of a person's total income (coupled with a decent basic pay packet) or their entire salary.

Advantages of Commission-Based Pay

Commission-based pay is a motivating tool that can benefit both your organization and your people. It's a transparent pay structure that a company can use to reward team members, control costs during peaks and troughs, and attract and retain top talent.

If commission-based targets are fair and achievable, they can act as a brilliant motivating tool for your team. A good commission can be the difference between a low salary and a great one, and – in some cases – the sky's the limit. A target-driven role can therefore have a number of benefits. It can boost people's engagement levels, encourage healthy competition among team members, and improve staff retention rates.

Disadvantages of Commission-Based Pay

However, when targets are unrealistic, commission can create conflict and get in the way of teamwork. A salesperson who has a low basic wage and is struggling to hit their targets might resort to underhand or unethical behavior to "steal" sales from their teammates, especially if they have come to rely on the additional pay.

Unreasonable sales targets – targets that are overly optimistic or that are not based on current market trends, for instance – can cause low team morale, high staff turnover, and disruption for clients. People might even begin to cut corners or use questionable tactics that are at odds with the company's values to close deals, just so that they can make a decent wage.

As a manager, it can be tricky to handle team members who earn vastly different amounts. Top performers can earn a lot of money, and this can cause resentment among colleagues who are failing to meet their targets, or who don't receive commission at all.

While you'll want to praise those who are doing well, you'll also need to be careful not to isolate those who aren't – and know when it's best to intervene and provide further support.

How to Manage People on Commission

Managing people on commission is different from managing a team with members on a fixed salary. The following six tips can help you to get the best out of your commission-based team:

1. Recruit the Right People

If you're hiring new commission-based team members, be clear on the skills and qualities that you are seeking, and ask competency-based questions that are relevant to these attributes when you are interviewing them.

American psychologist Martin Seligman found that salespeople who treated setbacks as temporary sold more than their co-workers who were pessimistic. With that in mind, look for evidence that candidates are self-motivated, have a positive outlook, and can cope well under pressure.

Think carefully about the skills and experience that best suit the role you are recruiting for. If you are recruiting for a traditional sales role then you'll likely be looking for people who have experience in similar roles, and who can demonstrate that they have the drive to succeed in a competitive environment. However, if you are recruiting for a consultative sales position, experience might not be the most important quality. Instead, you'll likely need to focus more on the candidate's values, to make sure that they are aligned to those of your organization.

In both cases, you'll need to make sure that you have the right team in place, that people can confidently meet their targets, and that they are happy with the commission structure.

2. Make Sure Targets Are Realistic and Fair

One of the keys to having a happy sales team is setting targets that are realistic and fair. Set them too high and your team members will become demotivated. Set them too low and you'll find it difficult to increase targets without damaging their morale. And, if they think that colleagues have easier targets than them, they might become resentful.

To avoid conflict, schedule regular one-on-ones to review team members' targets. Make sure that both their and your expectations are in sync by setting SMART goals. If they keep missing their targets, get to the root of the problem and take the appropriate action.

A poor performance might be down to factors outside of their control, such as market conditions or changes in seasonal demand. If this is the case, you might want to adjust their targets. However, if there's a problem with an individual's sales technique or product knowledge, you'll need to provide training and coaching to bridge the skills gaps.

3. Provide Regular Feedback and Encouragement

Don't wait for formal one-on-ones to give your team members feedback, especially if they demonstrate undesirable behavior, such as aggressive or unethical conduct when selling to clients. Informal coaching and short, "just-in-time" sessions are good ways for you to tackle performance matters when they arise. They can also help to keep team morale high and prevent small problems from spiraling out of control.

Conversely, if you spot an example of best practice, tell your team member there and then. Even star performers who regularly exceed their targets will appreciate praise for a job well done. Use your star performers' strengths to help under-performing co-workers, by organizing job shadowing or mentoring.

If a member of your team is failing to hit their targets, and your training, mentoring and guidance isn't making any difference, find out if there's another reason for their poor performance. Encourage them to open up, and ask them if there is any issue outside of work that is affecting them. If there isn't, you might want to consider setting up regular performance appraisals and introducing a more structured performance improvement plan.

4. Watch out for Poor Behavior

All managers need to make sure that their team members are acting in line with the company's values. So it's worth keeping an eye out for signs of unethical behavior, especially from people who are hungry for a deal.

In particular, look out for individuals who are too forceful or aggressive with customers. They may well end up with a sale, but they run the risk of losing you valued clients, demotivating other team members who uphold the company's ethics, and damaging your company's reputation.

You may also find that people become single-minded about chasing particular sales. This can lead them to neglect other small but important aspects of their jobs, such as keeping sales records up to date. Although this may seem unimportant to them, it could end up hurting your prospects of getting repeat business, because renewals have lapsed and contact lists have not been maintained properly.

If you see this kind of behavior, try creating a rewards system for good behavior or draw up a formal code of conduct for your team. If this still doesn't work, you may need to talk to the team member in question about their behavior, or escalate the matter further if it's particularly harmful.

Try the new Google Books

Check out the new look and enjoy easier access to your favorite features

Try the new Google Books

Check out the new look and enjoy easier access to your favorite features