Sales compensation is typically the largest part of cost of sales, and is the most important driver for sales performance and sales behavior.
Business Objective for Sales Compensation Management
Optimize the sales compensation to maximize the sales profitability and performance.
Typical Business Questions
- How my sales compensation practices stack-up to the competition?
- How does my sales compensation effect my sales, product and channel cost/profitability?
- Are the changes in sales compensation structures leading to a desired performance?
- What should be my sales compensation structure to get the desired performance?
- Should I front-load OR back-load the sales compensation?
- Which areas demand lesser OR higher sales compensation depending upon involved sales effort and product competitiveness?
Scope of chapter on Sales compensation
The sales compensation chapter has within its scope:
- All components of monies given to sales force.
- All sales channels including direct sales, to exclusive distributors to non-exclusive distributors.
- All levels in sales force from 'sales-person on the road' to the 'head of sales and distribution'. Different sales compensation structures exist for different levels.
Sales compensation have following components:
- Salaries of sales staff.
- Variable Sales commission per unit of sales done.
- Sales bonus for sales performance over a period of time.
- Sales incentives linked to specific sales campaign.
- Sales incentives linked to specific sales behavior. Etc..
Following are some of the behaviors around which business design their sales compensation (over and above sales productivity)
Sales Revenue Related Parameters
- Sales velocity
- Sales strike rate and leads conversion
- Sales performance consistency
- Smoothen the sales curve (For example- to avoid having 80%+ sales to be entered in last week of the month, and thereby overloading the sales order processing machinery).
- Ticket-Size of sales
- Completing the collection related to the accounts receivable related to the closed sale.
Non Sales Revenue Related Behaviors
- Adherence to Sales processes.
- Sales Quality in term of customer potential and customer risk.
- Adequate fulfillment related to sales order completion. For example- quality of application forms submitted by the customer.
An effective sales compensation has following success drivers:
Should not be too complex, should be clear and easy to communicate
A simple sales compensation structure linked to simply defined goals, keeps sales staff focused. A complex compensation structure generates confusion and people try to work around the system. A complex sales compensation system is also difficult to administer.
Should promote good sales profitability
Sales compensation should strike balance between the maximizing the sales revenue vs. sales profitability. Companies decide on sales compensation keeping in mind the profit margin assumptions taken at the time of product design.
Should focus on top 3-4 sales performance parameter
While there can be a dozen different sales performance parameters, you might want to influence only a select list. it is preferable to focus on 3-4 most important ones, and structure your compensation to promote those parameters. Goes unsaid that Sales productivity and revenue is always a part of this set of parameters.
Once you feel that you have been able to achieve the sales staff orientation for a given set of parameters, you can gradually move your compensation to promote next set of parameters.
Should be structured to promote consistency
Sales compensation can be based on the performance in the period along with the average across multiple periods, to ensure that there is a consistency in performance for a given parameter.
Should be structured to promote improvement
The bar has to keep on rising (unless there is a natural saturation point). The Sales compensation should reward improvement, and after a certain period of time, and penalize for maintaining status quo.
Should be structured to promote staff retention
Sales compensation should give rewards for high performing sales force (OR sales partners) to stay for longer with the company. This is not a hard and fast rule, as in some kind of market, you don't want sales people who are around for too long.
Sales compensation administration
Ability to administer the sales compensation with low OR zero error rate along with timely payments and self-explanatory compensation account statements etc. helps in building confidence with the sales force.