How and When to Pay Commission

A reader asks, "My company leases land from property owners for alternative uses. Some sales take only one or two months to close, while others take much longer.  Once the deal is signed, my company has to find the financing to re-purpose the property.  On average, securing the financing takes one to two months. We plan to base commission on the dollar amount of the construction project. Given the lag time between closed deals and financing, do you have any recommendations on structuring the compensation plan?"

While this question deals with one company's specific dilemma, similar situations occur in all sales organizations.  For instance a client might sign a multi-year deal and either not pay the entire contract up front or stop payment after one year.  Similarly, a client could return some or all of a large order.

Avoid Distraction

Your sales staff needs the single-mindedness to concentrate on meeting a property owner, uncovering a potential land lease, presenting the opportunity, generating a proposal, and closing the deal. Concern about whether or not the deal receives financing - which neither they nor the property owners have responsibility for or control over - is a distraction. Little good happens when the salesforce loses focus.

Potential Solutions

Solving that problem lies in recognizing and rewarding closed sales before financing gets approved. Frank Armenio, CMA, CFM and partner at B2B CFO suggests the following:

"Given the time lag between closed deals and financing, I would pay a percentage (25% - 50%) of the commission on the deal closing and the remainder when the financing is complete. The deal is not done until the financing is obtained. Further, if the financing falls through the first 25% - 50% needs to be charged back since I believe that would void the deal.

"Experience has shown me that sales reps normally go with the highest up front dollars. Therefore, re-payment on the back-end could take place far down the road."

Options

Frank's plan allows the sales rep to collect some commission up front. In that way your company rewards and recognizes a closed sale immediately, in a manner unconnected to the financing. I support that completely.

Consider Frank's idea. Collaborate and consult with other executives at your company to determine what percentages they deem appropriate. 

What happens when you have paid a certain percentage of the deal up front, financing is not approved, and the rep has a chargeback? I recommend dividing the amount into thirds and deducting it from their paycheck over a three month period.  Allow for flexibility with the starting date of the pay back.

Loss of Financing

If the financing does fall through, where does this leave the rep? You never want them to feel that all their hard work was for nothing, or to hesitate when closing the next deal.  
When a salesperson closes an otherwise sound deal in good faith, offer a "signing bonus" of some sort - either a flat fee or a small percentage of the deal.  Reps would not be responsible for paying this amount back if financing fell through.

Define Terms

To minimize the chances of any deal being turned down for financing, make sure the reps know what constitutes a "good deal."  What should they be looking out for?  Discuss red flags. Neither you nor the reps want to chase deals that fall apart.

Risk and Reward

The profession of sales involves risk taking. Top-producing salespeople are well paid; one reason for that is that no one in your organization has the ability to guarantee any sale.  Keep reps focused by offering a comp plan that acknowledges the time delay between a closed sale and a completed deal, and that rewards the salesperson's effort to go for the close.