This post was originally published on the HubSpot Sales blog.
The sales team at any organization has the power to directly impact the company’s bottom line. Depending on how much your team sells and how often, profits will likely follow suit. But the truth is, the way your sales team is compensated may affect your bottom line just as much.
Unfortunately, there is no perfect compensation plan. There will be pros and cons to any setup, and there will always be unintended consequences. The key is to find the right balance between controlling the downsides while still reaping the positive effects.
Here we take a look at several sales compensation plan possibilities, the behavior they incentivize from your sales team, the impact on the bottom line and, finally, how to make the most of them.
Setup: Your sales team is compensated based on volume sold and has the power to make pricing decisions with little oversight.
Behavior Incentivized: This type of compensation plan encourages sales team members to reduce price to increase volume. To most, cutting prices seems like the quickest way to gain additional volume and, therefore, commission.
Impact on Business: Here, your sales team is getting credit for revenue and volume, but your bottom line never sees the benefits. You’ll likely experience a struggling margin, as many sales may be made at low margins or even a loss. Additionally, these unprofitable sales are clogging up your processes so customers that do produce margins are not being served well.
“We often use the term ‘guardrails,’” he says, “because they can bounce around between the guardrails but they can’t go outside them. This may represent a minimum price they can offer or a minimum margin they can’t dip below.” This range should be based on who the customer is, the type of customer, the market they are in, the size of the customer, and the nature of the opportunity.
Setup: Your products have list prices, your customers purchase off of those list prices and, perhaps, there is a standard discount structure.
Behavior Incentivized: This situation is where volume incentives work best because the discount structure is properly documented.
Impact on Business: If the sales team sticks to the “guardrails,” it will impact profits in a positive way. However, a well-defined structure is a must.
The Fix: Aggressively incent people to bring in volume since the structure prevents unwanted behaviors.
Setup: Your products or services have highly customized pricing and final prices are negotiated with every customer.
Behavior Incentivized: Sales team members will do whatever it takes to close the sale.
Impact on Business: There is little accountability, and sales are not closed in a predictable manner. This means the monthly numbers are always up in the air. The
Fix: Don’t base your compensation plan entirely on volume or margin. You will also need structure or “guardrails” for your team to operate within. These may not be as rigorous as a team with list prices and a set discount matrix, so you won’t want to rely on these alone.
Additionally, guidelines, by definition, allow for some latitude within them, so you’ll want to encourage your team to choose the most profitable option. If they can sell a product between $10 and $15, for example, you’ll want salespeople to strive for that $15 number; however, to not lose business, discounts are unavoidable. This is why you’ll want some kind of margin component to your compensation structure.
In this case, you may opt for a weighted approach: If a team member makes a sale at a high margin, perhaps they earn an extra 10 cents for every dollar toward their quota. Conversely, if someone made a sale at the low end of the range, they may receive 90 cents credit for each dollar toward his quota.
Setup: A percentage of compensation is driven by a volume goal and a percentage is driven by a margin percentage goal.
Behavior Incentivized: These are competing interests, which creates an internal conflict within your salespeople.
Impact on Business: If your sales team is well educated and trained on how to achieve maximum profit in this situation, your bottom line will truly benefit. However, some salespeople do not think outside their individual goals and may not understand how to balance volume with margin. In this case, they may just give up on the margin and push for volume alone.
The Fix: You must understand your salesforce and where it is on the spectrum of business knowledge, business capabilities, and decision-making capabilities.
“I'd go with the revenue-driven goal,” Hohman advises. “Salespeople would need to achieve a certain amount of dollars, but I would give more credit or less credit depending on the margins. It comes down to how valuable that sale is for the business.”
Tips to Succeed With Any Approach
No matter which compensation plan is right for your organization, there are two things that will help maximize profit:
Provide the sales team with data visibility to make good decisions. If you want salespeople to be incentivized on margin, they must have the visibility to margin data. Although, this could be a sensitive topic for many companies. Ask yourself, "How am I going to give them the information they need to make good decisions?" A lack of data means you may need to be tighter with your guidelines and may experience more exceptions that will need to be managed.
Secondly, train your team on how to use that information to make a better decisions. Your system must support this process and your team -- especially members who have not had the same experience in the past and may want some additional coaching.
Remember, drastic changes are risky to any business, especially when unintended consequences are likely. Try a pilot program with a small team or roll out a little of the plan at a time. You can always build on it. Phase it in over months or years until you get it right. Depending on your sales team, different incentives will work best and keep your team involved as you determine what works best for your organization.