Here's what's happening.

sales commission structure
Dec 06 2017

Sales Commission Structure

Incentivizing your sales team is the best way to grow your business, hands down. However, the sales commission structure can be one of the most difficult and nuanced components to get right in a business.  I share this after my experience in starting a growing a sales team.

At Verde, we are very transparent in our sales commission agreement between our energy efficiency analysts and the company.

Base – provides security

It is important to provide a base salary for a sales professional, since it can take a while to ramp up and become successful. Even for the fastest learner, they need time to train and learn.

Providing a base can also help smooth out normal business cycles, which happen to almost any industry. For our company, we often have deadline around increased utility rebate fiscal years. This can lead to wild variations in income for the analysts. Therefore, the base can provide stability throughout the year.

In our sales commission structure, we have a base of $26,000. Once this is repaid to the company by selling $260,000 (at a 10% commission rate), the sales commission agreement goes up to 14%. We currently reset this sales commission structure quarterly.  We find this works better than annually as it triggers 4 times a year where the team is motivated to sell more. When we previously ran with this sales commission structure annually, it only created one large incentive period.  This was hard to bring on new people during the mid-year, as well as took a long time to generate higher sales incentives.

Finally, we put a lot of time and thought into the $26,000 base salary. We did not want to make it too low, where there were times that people could not make rent or take the bus.  Additionally, we also did not want to make it too high, where we make people comfortable with a mediocre compensation. Attracting and retaining highly impactful salesmen and saleswomen is the goal, whereas people that are not ambitious will not be attracted not succeed in this compensation plan.

Sales Commission Structure – Rates

I feel very strongly that good incentives for sales professionals should increase after a certain level is met, not decrease. This seems counterintuitive to people when I explain it.  However, it rewards high achieving individuals in the organization. It also makes people hungry when it is most important, when they have already delivered to the company.

One bonus feature of this is that it also keeps talented folks – the ones that deliver most the organization also receive great compensation. That is important since keeping great people is one of the most important challenges for a company.

Not basing profit on commission

In our business, we have decided not to base commission on profit, and instead base it on revenue. In general, this sales commission structure helps drive top-line growth, which a salesman or saleswoman can control. As long as they cannot set pricing, this will not negatively impact the bottom line margins of the company.

In addition, this provides a unique value to our customers. Since what we sell (energy efficiency) has a key indicator of ROI (return on investment), the sales rep is motivated to sell based on what brings down the ROI.  This does not always align with what is most profitable to our company. Ultimately, we hope that this provides continuing value to our customers, both helping the company and the individual that completed the sale.

Sales Commission Structure – Challenges

One of the key challenges that we faced in our structure is that sales commissions were initially compensated too soon.  We paid commission as soon as the project was closed with the customer. However, in our business, we often have to wait for the ComEd Energy Efficiency Program to preapprove utility incentives for our customer and their project.  This can take anywhere from 10 days to 25 days. In addition, some of the more complicated lighting controls and special order products can also lead to delays.  Our normal backlog of work can range from 20 days to 60 days.

Basically, we were writing commission checks to our energy efficiency analysts long before we received any revenue. In our current growth trajectory, we noticed that this was unsustainable.  At the very least, it was an added financial burden on the company.

We made a switch to account for half of the commission at the time of sale.  This provides some instant gratification).   Additionally, we pay half of the commission at the time of installation and invoice. One downside of this is that it creates added work for the analyst to account and reconcile projects.  Eventually as we scale, we hope to have some custom built software in place shortly to make this seamless.

While best practice is to pay sales folks when the company gets paid, we do not implement this.  We continue to update our sales commission structure, so this and a higher base are both currently being considered.


Popular Posts

Mar 25, 2018BY Verde

5 Reasons Why an Advisory…

In 2010, Verde Chicago was launched to help change the way the… [...]

Feb 06, 2018BY Verde

Are Smart Power Strips Worth…

Really there are two questions here regarding Smart Power Strips: Is it… [...]

Related Articles

Default Image3
Sep 05 2018

Composting at Work and other ways to engage employees in sustainability

There are so many ways to get started in making your workplace more sustainable, but it takes buy in from the ownership.  Whether a huge corporation or a small business, your efforts at making your…

Continue Reading >
Apr 18 2018

A Sustainable Education: Debra Kutska from Oakton Community College

Debra and Jamie sit down to discuss the progress and investment that Oakton Community College has put forward, creating a truly sustainable education for their students.  Debra comes from the Brookfield Zoo community, where she…

Continue Reading >

Get An Energy Efficiency Assessment

Please fill out the form below and connect with an energy efficiency consultant.

Verde Energy Efficiency Expert 1801 W Berteau Ave, Suite 202
Chicago, IL 60613

T (779) 333-0821