Clinton Gott of Better Sales Comp wrote a great piece on best practices in focusing retail associates on improving store-level results. If you’re in Retail and looking to focus your store management and employees on what they most directly control, click through for a very practical overview.
A/R metrics in sales compensation plans are relatively rare. There is often an impulse to include them from Finance, but in the end the sales leadership usually manages to impress upon Finance the importance of freeing sales people to sell and letting a lower cost resource like an A/R specialist in finance take the lead on pulling in the cash.
That said, it’s useful to recognize that A/R can be attributed to one of two issues: deal terms, or on-time payment. Arguably the sales person has more control over deal terms, and deal terms affect A/R balances. So incentives around selling within the parameters of “standard deal terms” can make a lot of sense if that’s the issue (e.g., slightly reduced commission rate or sales credit for deals sold with non-standard terms). If the issue is late payment then the next question is whether that’s due to non-acceptance of the products/services (quality issues), or just chaos and customer cash retention. If it’s quality issues, then do we really want to penalize sales – they probably have their hands full selling in spite of the quality issues. If it’s chaos and cash retention, then it’s probably better handled by an A/R specialist.
In spite of all those caveats, it is a very solid practice to reverse sales credit for any invoice that is reserved for bad debt based on the company’s policies. This crediting rule has the effect of giving the sales people a real interest in avoiding non-collection, but on an exception basis (without carving out some portion of the incentive at target to fund an A/R metric). Then of course when the bill is paid, the sales credit goes back in for the sales person.
However, if A/R has become a significant issue for the company’s balance sheet then it is often a reasonable metric to put into the plans of sales leadership (not individual contributors). They often are the ones approving non-standard terms. And they can stay on top of the non-collection exceptions and put pressure where it’s needed to help with collection.
There are three income statement lines affected by improved sales compensation plans:
- Revenue – total sales volume can increase with the right incentives. And it can increase with a sales force that isn’t distracted by a complex comp plan and shadow accounting. Revenue can also be increased by focusing sales people on strategically important sales (right customers, right products, long term revenue streams, etc.).
- Margin – by focusing sales people on the most valuable sales and on correct pricing and deal structure, margin can be increased even if revenue is not.
- Cost – While this is not typically the focus of sales compensation plan redesign, the cost of comp can be managed down by paying less to sales people for the same productivity. More often costs are managed down by expecting sales productivity to increase faster than sales compensation. Other costs that can be managed include the cost of administering the plans, cost of delivering the company’s offering (reduced through better deal structure), and the cost of turnover in the sales organization due to un-motivating, unintelligible, or unfair comp plans.
The specific issues faced by the business will determine where the value creation can happen. Ask why you are considering changing the plans, what benefit you expect to gain. Ideally, substantial changes in sales focus that yield business results are the result of a full program that is supported by the compensation plans. It is rare that compensation plan changes alone will make a dramatic difference on the income statement. It is also rare that a change in the market strategy, a change in sales roles, a new coverage model, or other important changes in the sales job will be successful without support from the sales compensation plans. So the ROI is usually best calculated based on the overall change initiative of which sales compensation is a part.