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.
CEOs don’t need to understand the details of the sales comp plans, but they do need to make sure that a few things are working correctly. Here’s a check-list for what you should be able to demonstrate to your CEO in your next plan review/approval meeting:
- The plans are simple and easy to understand. You can explain them to a high schooler who isn’t math-inclined, and they understand them.
- The sales leaders believe the plans are right, and know how to use them to help manage and motivate their team.
- The amount of at-risk pay increases with increasing ability to influence individual measurable sales results. And those with less direct influence over results have less risk and upside in their plans.
- All incentive measures are objective and financial, except for those used in sales roles with very long sales cycles (market development, huge contracts…) .
- If you ask a sales person what they need to do to really make money on your plan, their answer is the same thing you actually want them doing.
- The cost of compensation works in your business model. Over a multi-year period, comp cost per person goes up with the labor market (3% or so on average across the team) while sales volume per person goes up faster (5-25%, depending on the stage of the business). This is because the sales leaders are adding to the selling capacity of each person through great tools, smart organization, leveraging good marketing, the right coverage model and market strategy.
The only way I’m aware of to make sure sales is a variable expense is to use external sales agents, distributors, or channel partners. If a business hires dedicated direct sales people, they will only be retained if they earn their market value, or close to it. So while the variable portion of sales compensation will rise and fall with sales to some extent, there is a limit to how much it can practically vary. In the long run of course, the sales team can be increased or decreased in size to match business needs, just as any other functional area can hire or terminate employees based on the needs of the business.