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Should companies pay salespeople based on profits? Most agree the key measure of sales performance is revenue, what the company gets paid for the sale. Expressed as a sales goal, sales departments link sellers’ pay to “winning” as much revenue as possible. However, not all revenue will prove profitable for the company. Should management link the payout of the sales compensation plan to sales profitability of the orders?
Aside from the finance team cheering “absolutely,” most sales leaders agree, if the seller can and should influence order profits, then management will add a second measure of profits—in addition to revenue—to the sales compensation plan.
So, the key phrase here is “if they can influence.” Sales compensation plans reward successful persuasion. If sales management requests sellers to contribute to improve sales order profits and they can affect the profit outcome, then include a profit measure in the incentive plan.
The following are typical types of profit measures and their applications.
Each of these profit measures applied correctly in the sales compensation plan can improve order profitability.
The growth rate of a company has an impact on the use of profit measures. Consider the young start-up: It needs revenue, almost any revenue. It’s not uncommon for most of the early revenue to be “not profitable.” These young companies will provide a fixed list price to sellers. Yet, management will step in with price concessions if securing the deal warrants a discount. However, for the most part, selling without pricing flexibility is the norm and is not part of the incentive plan.
Scaling companies—those growing really fast—more volume is better because it reduces unit margin of production, thus fueling profits. While sellers may not have pricing authority, management will give them sanctioned discount lists. Adherence to pricing schedules could be part of the incentive plan. In low-growth companies, securing volume becomes tantamount, but not at the expense of profits. Greater pricing freedom is afforded to sellers with both associated risks and rewards. The use of profit measures increases significantly and becomes an important feature of the incentive plan. Finally, when adopting new product and segmentation strategies to reignite growth, sales management will use profit measures to protect the core business but use production measures—absent profit measures—to drive new strategies.
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