There are lots of different approaches to paying commissions to salespeople. Some work very well, some just do the job, and some are absolutely hated.
Commissions are not just about money but perhaps more importantly about recognition.
It’s an actual high!
What transpires in our minds when we are acknowledged and rewarded? Our brains crave more attention. They actually yearn for it.
The hypothalamus and dopamine receptors are two parts of the brain that are impacted by recognition. The chemical dopamine, which promotes happiness and fights depression, is delivered to dopamine receptors in the hypothalamus, which in turn regulates basic biological processes like eating and sleeping.
Regular hypothalamic stimulation and dopamine synthesis are increased by recognition, which influences the brain’s adaptability and boosts output and quality of work.
Regular wins are addictive – Las Vegas understands this concept
The more we understand human psychology, the more modifications we can make to our daily routines and working environments to fully use what the brain has to offer. To take advantage of rewards and recognition psychology and create businesses with a competitive edge, you must first understand it. Why not take advantage of the chance to easily and swiftly raise the standard of living for your employees and the output of your companies?
Rewards and acclaim are beneficial to us. It increases the duration of our careers, our health, and our general well-being, and it encourages workers to feel more commitment to their work. It changes the structure of our brains at the molecular level, and it’s the best-kept secret to luring and keeping talented workers.
So how to design commission programs? Easy, we get more of what we reward and less of what we disincentivize.
Too many commission programs are deceptive. Lots of small print and conditions which make actually earning commissions almost impossible. The result is the salespeople will quickly learn they can’t win and will stop working beyond the minimum that keeps them employed.
Commission rates that drop once target is hit or are capped? This absolutely doesn’t make sense. In virtually every business incremental sales is the gravy! Once a company’s sales volume has reached the point where fixed costs like rent and salaries are covered the profit margin, on each incremental sale, goes through the roof! It’s not unheard of for gross margins to increase from 30% to 70% or higher with incremental sales.
Why then would companies cap or lower commission rates on incremental sales?
Despite what might seem illogical, an organization that caps commissions actually makes less money. While cutting costs on incentives may be the motivation for commission caps, it’s important to keep in mind that you’re also reducing performance.
Your compensation costs will go down with a sales commission cap, but your staff will become less motivated as a result. Yes, you’ll give out less incentives but also run the danger of encouraging poorer performance, which could result in decreased revenue. Unfortunately, this could start an even worse cycle of subpar performance and reduced incentives; in such case, nobody wins.
The best commission programs drive sales on the most profitable parts of the business while supporting long term growth.
The number one reason top sales performers leave a company is because of negative changes in commission programs. I have also known companies to fire top performing salespeople because management resented signing off on the high commissions.
Don’t be Penny wise and Pound foolish.