Incentivising Through Commission Payment

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Man chasing carrotWe’re often asked about how to implement employee commission under a piecework or other performance-related pay (PRP) system. We’re asked if incentivising through commission payment works as a motivator.

Piecework is where an employee is paid a basic wage and an additional amount for the number of ‘pieces’ processed. ‘Pieces’ can be anything from widgets delivered to calls answered. Performance related pay is more general whereby some target is set and an extra payment is made when that’s achieved.

Both result in a ‘commission’ paid over and above some basic wage.

Rules for Motivation

There are three basic rules in offering any form of piecework or PRP:

  • The employee has to have the ability to influence events. If they put effort in, they have to believe that the pay system is such that they will benefit (and not someone else). They must also believe that if they perform but colleagues don’t, the commission will still be earnable. Employees will estimate their chances and factor down the amount promised by the chance that they’ll actually be able to earn it.
  • The employee has to believe that if they are promised the commission, management will actually pay it. Commissions are usually paid for from the excess profits realised by the additional effort and result that the employee under the commission system generates. If, for example, there is no profit from which to pay, and management decline to pay, the promise to pay is broken and that history lives on to jaundice the employee’s view of how much realistically they can earn from commission in the future.
  • The employee must personally feel that the amount promised as earnable is meaningful to them as an incentive. If they feel there’s a 33% chance of achieving the commission and the commission is only say £3k, they’ll assess if the effort and dedication to task is really worth £1k. If they already earn £20k, an extra £1k will be unlikely to motivate.

The basic rule is that money is not generally a motivating force. There are certain conditions under which it might become a motivator and one such is if there is enough of it. The general rule is that for money to motivate there must be a realistic chance of earning an extra 30% over and above basic wage.

Scheme Set-up

In PRP schemes, one of the core issues is how ‘performance’ is to be measured. It’s slightly easier under piecework since often each ‘piece’ is well differentiated and it’s easier to see when the piece has been processed. Nonetheless, there are still difficulties, particularly when more than one person participates in the work.

There are two very different ways these pay systems can be set up.

Piecework pays per widget or service. Whether that widget processed or service done realises a sale and whether that sale is profitable is not measured. This is one of the flaws of piecework. For example, if a ‘pay per click’ (PPC) operative in a web marketing company is paid for every click-through achieved, this is somewhat distant from the business result. The payment could therefore be made because the click-through rate was achieved without management actually knowing if a profitable sale resulted.  The sales value coming from the PPC activity that then feeds the business result depends on many other variables. Example variables include how attractive the company’s new product is, how much more attractive a competitor’s newly introduced product is, whether there is an offer of discount at that point in time to entice customers and even how high generally the web site is in Google rankings.

The advantage of piecework is of course that it is easy to measure and that measurement can be made immediately and the payment to the employee made shortly afterwards.

Performance related pay schemes are generally combined with key performance indicators. Taking the PPC operative in the above example, objectives for increased sales in markets the operative is responsible for can be set. An example objective might be a sales increase of 50% in a particular territory sustained over a particular period.

The disadvantage is that again there are again many variables upon which that result may depend. Colleagues may indeed prevent the PRP being earned by taking action on their objectives that thwart the PPC operative’s earnings.

Incentivising through commission payment

Implementation is technically and legally complex.

Management needs if possible to retain the ability to modify the commission and re-negotiate if the incentive is not working. That means that if at all possible the commission should not be contractual (or at least able to be ‘re-negotiated from time to time’). If management writes to someone stating figures and doesn’t identify limits or constraints, it becomes contractual and the arrangement can only be changed with the employee’s agreement. Payment must then be made irrespective of the financial strength of the business.

Management needs to not be obliged to pay if the business can’t afford it. This is a difficult one. Alternatively management needs to be sure that any commission is self-funding and that the turnover-minus-overheads can support all commissions so that all commissions promised to all employees can be paid.

There is a huge science to getting piecework and performance-related pay schemes right. Do call us for further help.

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