Tag Archives: Profitability

We want to pay on both revenue and margin – how do we do that?

Often sales people influence both the volume of sales and their relative profitability. Rewarding simultaneously for both puts the incentives in line with what’s best for the company.

Three effective ways to approach this:

  1. Make revenue the primary measure using a goal-based incentive (see this post for a clear explanation of how a bonus or goal-based incentive work), and add a profitability multiplier. For example, offer the opportunity to earn as much as an additional 20% (1.2 multiplier) at year-end if a stretch profitability goal is achieved, lose as much as 20% of total earnings (0.8 multiplier) if they are below an unacceptable level of profitability, or have no effect on their own earnings in-between (1.0 multiplier). This would be most appropriate if revenue is the most important focus for sales, with profitability in the also-important category. It would also be appropriate if profitability is difficult to measure at the individual level, but very accurate by business unit or in aggregate.
  2. Measure sales people only on gross margin or gross profit dollars, and drop revenue as a sales compensation plan measure. This would be appropriate if margin can be accurately tracked and reported by individual sales person. Here again, a goal-based incentive is probably the best choice.
  3. Use a matrix with revenue goal attainment on one axis and profitability goal attainment on the other. In the middle of the matrix (at goal on both), pay 100% of the target incentive. As both revenue and profitability increase, pay over-target earnings. Pay very little for below-goal performance on both. And pay in-between if they’re over on one measure and under-goal on the other. It’s a little tricky to design the matrix, but once you’ve got it, it’s very easy to understand and administer.