Sales Compensation Brief-Issue No. 200320

Sales Compensation: Use the Right Measures!

At the heart of a sales compensation plan are the performance measures. You may wonder which measures and how many are best. Let’s take a look at what others do and suggest some guidelines for selecting and weighting performance measures. Follow the three rules of performance measure excellence.

#1: How Many Measures?

A sales compensation plan offers an excellent opportunity to direct seller behaviors. The plan also looks like a great vehicle for linking sellers’ pay to other objectives such as sales process management, corporate measures or administrative compliance. Can a sales compensation plan “carry” all these measures? Yes, but at what cost? Like a rowboat, at a certain point, the number of measures can overwhelm the program. Most sales compensation architects prefer to keep the number of measures to three or fewer.

84.5% of the companies reporting in our most recent Sales Compensation Trends Survey have three or fewer performance measures. Rule #1: No more than three measures.

#2: What Are the Top Measures?

In the same survey, the participants shared their top measures.

The top three measures are tied to sales production: sales revenue, new accounts, units/orders. Of interest, 21.7% of the companies use a profit/margin measure. In such instances, we expect sellers to have an impact on profitable selling by either managing pricing, discounting, product mix or terms and conditions. Rule #2: Use outcome/production measures that sellers can impact.

#3: How Often to Change Performance Measures?

What do you want the salespeople to do this year? What should they keep doing? What should they stop doing? And, what should they start doing?

More than 90% of all companies change their sales compensation plans on an annual basis. The most common change is updating the performance measures to ensure alignment with business objectives.

Notice the top two changes that companies make on an annual basis are the type of performance measures and the weighting of the performance measures. Rule #3: Review performance measures on an annual basis to ensure alignment with business objectives.

Use a Collective Process Annually

Sales compensation serves numerous objectives. Involve the right stakeholders: sales leadership, region management, finance and marketing. Lay out a spreadsheet of all jobs, performance measures and their weights. Test each measure for each job against the company objectives and desired seller outcomes. The best sales compensation plans motivate sellers, align with company objectives and have senior leadership consensus.

Follow these three rules:

Rule #1: No more than three measures.
Rule #2: Use outcome/production measures that sellers can impact.
Rule #3: Review performance measures on an annual basis to ensure alignment with business objectives.

REVENUE! REVENUE! REVENUE!

The most common measure of sales performance is “revenue.” Also known as “sales results.” This is the money a customer will have paid the company for its products/services. However, there are many types of revenue. Here is a listing of the most common revenue types used in sales compensation plans.

Booked Sales. The most common measure of seller revenue performance is “booked sales.” This is the amount of money a customer has committed to purchasing; as in “the order has been booked.”
Invoiced Sales. A bill has been sent to the customer and the revenue amount has been recorded as an accounts receivable.
Customer Paid Revenue (CPR). Regardless of booking status or invoice status, customer paid revenue recognizes only the actual money received by the company. Companies will use this measure when order cancellations are high and non-payment common. In such instances, sellers need to ensure customers are making payments; otherwise, they are not paid.
Purchased Versus Recurring Revenue. One-time purchases are “purchased revenue.” Ongoing revenue is classified as “recurring revenue.”

Revenue Status

There are several types of revenue status:

Total Billed Revenue: the amount of total billed revenue for the purchase
Incremental Revenue: the amount of revenue over existing, embedded revenue
Retained Revenue: the amount of revenue retained each year from existing customers
Revenue Churn Rate: the lost business divided by the new revenue or total revenue
Revenue Growth Rate: the percent increase (including lost revenue) compared to last period’s revenue

Recurring Revenue Flavors

There are numerous ways to measure long-term and recurring revenue:

Total Contract Value (TCV): captures total contract revenue value
Monthly Recurring Revenue (MRR): recognizes the monthly revenue from a customer
Annual Recurring Revenue (ARR): same as monthly recurring revenue except on an annual basis
Incremental Recurring Revenue (IRR): the amount of “additional revenue” over the previous period

David

David Cichelli
Sales Compensation Educator, Author, Speaker
Connect with me on LinkedIn!

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