Splitting commissions between multiple payout events can add an unwanted layer of complexity to compensation management. But when managed well, commission splits are amongst the best ways to build a productive sales team. Here's why.
Why are commission splits used?
Using a split commission plan to compensate your sales team is a good idea during the growth stage of the company. By splitting the commission across different payment events, your agents are more motivated to retain customers, increase overall deal value, and generate repeat orders. It directly buffs up the bottom line of the company by reducing marketing spend and increasing profit margins on every deal.
There are many other reasons why businesses prefer split commissions over upfront payments. The most prominent one is risk management. When paying the entire commission at once, the company alone is responsible for the risk of losing the customer. On the other hand, a split divides the risk between the agents and the business.
Moreover, the lifetime value of most deals cannot be accurately estimated at the beginning itself. Many new-age SaaS products involve a dynamic usage clause which makes it nearly impossible to gauge the actual contract value at any given point in time.
Here's how commission split payments make life easier for the company.
● Motivates the sales team to actively engage the customer until the end.
● Promotes effective onboarding, scalability, and closing since the salesperson doesn't get full compensation otherwise.
● Reduces the need for clawbacks of the contract terms changes over time.
● Helps align accounts and finance properly because compensation is only realized after profits are registered in the statement.
What are the drawbacks of using a split commission system?
Even though this system is popular worldwide, there are drawbacks that need to be accounted for.
● During the product installation and rollout phase, the salesperson has little control over events. Once the contract has been signed and the client onboarded, the operations and management teams take over. They handle the installation and enterprise-wide rollout. There are chances that issues may arise during this phase and the deal terms may change. It's unfair to penalize the sales team if any issues are identified during this phase since they have no role to play here.
● The motivation of the sales team to pursue new deals and upsell old ones may not be present. There's a large time gap between work and reward which makes it harder for them to see the value of their work get realized.
● Lastly, the biggest issue with split payments is the amount of manual work involved. Each payout event needs to be linked to the original booking making it complicated. Since most firms use excel sheets to track this data, there are chances manual errors might creep in and corrupt it all.
How to mitigate the drawbacks?
● The first step is to reduce the number of payout events. Too many splits will make it very hard to manage.
● Secondly, reduce the number of different systems being integrated into this workflow.
● Estimate the most common outcome via periodic audits and pay commission based 9n that.
● Manage the difference between booking and invoicing. For instance, pay bonuses on bookings and commissions on the invoice.
● Use robust commission tracking software to automate the process.
Automating the commission splitting and payment process with software like Blitz will make it very easy for compensation managers and administrators to manage commissions.