Is your top paid sales rep your most profitable or productive?
There are many ways to evaluate the effectiveness of your sales compensation plans. Bet you haven’t thought about this one, have you? You can easily figure out which sales rep has been paid the most, right? Just add up all the commissions and bonuses that you’ve paid to date this year.
But determining profitability may take some time depending on the complexity of your sales compensation plans, attainment data, and of course cost structure. For now, I’ll talk about revenue.
I love data! I love looking at it in many different ways to find out the real story that is often hidden. I was working with a construction supply company that was having problems. Their revenue was below plan, their commission expenses above plan and no one could figure out what was happening and why. Does this sound familiar?
I reviewed their commission plan documentations and felt the plan wasn’t designed correctly. I began looking at the data and found that commission expense and revenue didn’t correlate. I discovered that one sales rep was paid about $90k more for bringing in the same amount of revenue as another rep. I had my suspicion but management said that what I suspected was impossible. So, I asked for more data and began looking into that.
What I found matched my suspicion. The sales rep that was paid the highest knew how to game the system to make the most commission and bonus. This sales rep was doing nothing wrong, he was just following the sales commission plan! The sales rep who made $90k less was doing nothing wrong, except he missed out on a lot of cash!
The sales compensation plan had a large threshold in which the sales rep received no commissions until it was crossed and once the quota was achieved, there was a very aggressive accelerated rate that kicked in. The sales rep who made the most money held sales (which was easy to do) until the threshold was reached and once into accelerators, closed like crazy and each month it started all over again with a clean slate. This sales rep had the classic saw tooth attainment graph with no sales one month and tremendous sales the next month. The big problem here is their highest paid rep was no more productive than their lowest paid rep. It is sad to say that this company didn’t make the necessary changes in their sales compensation plan and is no longer in business! Their demise was not solely limited to sales compensation.
Back to profitability which is a similar case but instead of tracking commission expense to revenue, you track it to profit. Profit data is usually harder to obtain but you can obtain it! You may or may not want to share this profit data by product or sale with your sales team. When looking at profitability of a sale you want to look at the sales behavior. Is the sales rep discounting beyond what is necessary, throwing in service for free, adding additional products at no cost, etc. One company structured their sales compensation plans to reward the account manager for new sales. On the surface that sounds like what you want to do, have the account manager further penetrate the account. But there was a flaw in the design. The account manager could either sell an add-on product and receive commissions on the incremental add-on or they could rebook the entire sale with the new add-on, which is what they did. Can you blame them? These account managers actually were able to save their customer money by rebooking the entire sales at a lower rate, which needlessly ate into the company’s profit. Their commission expense went sky high but their revenue didn’t.
What impact does your company’s sales compensation plan have on your revenue and profitability? Remember that on average you are spending 14% of every revenue dollar on commissions!