Most organisations link some portion of salespeople’s salary to a sales incentive plans. For example, they pay a commission on the revenues or a bonus for achieving a territory sales quota. This proven “pay for performance” approach motivates salespeople to work hard and drive sales results.
But today, companies increasingly expect salespeople to deliver not just sales but profitable sales growth. Logically, it follows that a sales force can align salespeople’s effort with company profitability goals by linking incentives to profit, rather than sales metrics.
To help you determine whether basing sales incentive plans on profitability is something you should consider, start with two questions.
- Is profitability strategic? Companies sometimes sacrifice profitability for reasons such as building market share, blocking a competitor, or gaining entry into a market. Consider paying salespeople for profitability only if profitability is a strategic goal.
- Is profitability controllable by salespeople? Salespeople who sell a single product at a set price have no impact on the gross margin of sales; the way they increase profits is by selling more volume. Thus, there is nothing to be gained by paying on profitability; the result will be the same as paying on sales. Salespeople have the ability to impact gross margin when – 1) they can influence price and/or 2) they sell multiple products with varied margins. Paying salespeople for profitability only makes sense if at least one of these conditions applies.
If profitability is both strategic and is within salespeople’s control, then four additional questions can help you determine the best approach for using incentives to encourage more profitable selling.
- Can you measure gross margin at the territory level? The most straightforward way to encourage salespeople to sell more profitably is to pay incentives on territory gross margin rather than sales.
But if the cost is too great, consider other options for using incentives to encourage more profitable selling (see questions 5 and 6).
- Do you want to share profitability data with salespeople? If you can measure territory-level margins but want to protect the confidentiality of profit margins from customers and competitors, you may want to avoid sharing margin information with salespeople. Some companies have had success paying on margin proxies–artificially calculated margins that reflect the relative profitability of products, without revealing actual margins. Yet margin proxies still reveal a lot of information. If confidentiality is a big concern, consider other options for encouraging more profitable selling (see questions 5 and 6).
- Do salespeople influence price? If the cost of measuring and sharing territory gross margin is too great, then linking incentives to average selling price is a good alternative for encouraging profitable selling when salespeople influence price
- Do you want to drive sales of higher margin products? If the cost of measuring and sharing territory gross margin is too great in a sales force that sells multiple products with different margins, then paying on sales by product grouping is a good alternative for encouraging salespeople to spend time on more profitable or strategically important products.
Sales incentive plans can play a key role in aligning sales force effort with company strategies. When profitability is a strategic objective and is also within salespeople’s control, sales incentive plans that rewards salespeople for profitable selling can be an effective way to motivate achievement of company financial goals.
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