Category Archives: Sales Comp Answers

Accounts Receivable – good sales comp measure or not?

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.

What is the ROI on a sales compensation plans design change effort?

There are three income statement lines affected by improved sales compensation plans:

  1. 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.).
  2. 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.
  3. 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.

Base Salaries for Sales – annual merit increases, or not?

The question: Should we be using our standard annual merit pay adjustment process with our sales team’s base salaries, or should we just expect them to earn their own raise through increased sales?

The answer will depend on a few characteristics of your company, your sales jobs, and your sales incentive plans, so find your situation below for some best practice pointers.

If you’re in an early stage business with less than 50 sales people, or if most of your sales people have at least half of their annual compensation coming from their commission or variable pay…

In this case, it is most common to find that base pay is adjusted rarely, if ever. Adjustments are usually triggered by significant increases in responsibility (quota size, team lead, etc.), and are not done on an annual cycle. Over the long run this may lead to a very incentive-rich pay mix as the most tenured sales people build a book of business which rewards them more and more while their base pay stays the same, potentially over many years.

This may eventually require adjustment via increased base pay and a change in the core incentive structure as the business matures and the focus of the relationship with the customers shifts from being primarily with “their” sales person to being a larger overall relationship with your company. But in many businesses, this arrangement can persist for years and is a sensible approach.

If your business is more mature, your sales force is larger, or if your sales people have a more base-rich pay mix (60% or more of total compensation at target in the base)…

This indicates that your sales people are probably part of a larger selling team and/or your brand and customer relationships are strong enough that the customer would see their relationship and decision to buy as more influenced by the company than by the specific sales person. This doesn’t mean that the sales person is unimportant, just that they are executing their part of an overall customer life cycle that is primarily orchestrated by the company.

In this case, it’s important to maintain the pay mix. So expecting the sales person to “make their own raise” would eventually result in a pay mix that is too incentive-rich, and run-away compensation amounts for the most productive sales people. So, to keep the pay mix in balance, the base and variable sides must be managed. Some businesses manage the base through the regular annual merit cycle so that each person’s base is adjusted based on standard company criteria. At the same time, the variable opportunity at target is generally increased in alignment with the annual merit guideline.

In other businesses, the base pay and total compensation for sales are managed, but not necessarily on a strict annual cycle. Adjustments every two or three years can also work well to manage position against market as well as pay mix. And, of course, there will be a need to do some between-cycle adjustments for specific situations as they arise. However, it should be noted that there’s usually more required in these businesses than just making the sales numbers, and the annual performance management, assessment, and merit adjustments provide a good opportunity to reward for all the things that matter and that may not be directly reflected in sales results each year (skills, experience, leadership, long-term potential).