Sales incentive plans
Most organisations link some portion of salespeople’s salary to 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.
Linking sales incentive plans to profitability
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 entering a new 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:
- they can influence price and/or
- they sell multiple products with varied margins.
Paying salespeople for profitability only makes sense if at least one of these conditions applies.
Measuring sales incentive plans to profitability
If profitability is both strategic and within salespeople’s control, then there are four additional questions that help determine the best approach for linking sales incentives plans to encourage more profitable selling.
- Can gross profit be measured 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.
- 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.
- 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 those rewards salespeople for profitable selling can be an effective way to motivate achievement of company financial goals.
How a CRM can help with Sales Incentive Plans
A CRM system benefits an organisation through the visibility of its sales activities. This visibility is fundamental to managing sales performance and control of the sales process. This visibility enables management to understand why, when, who and how opportunities are being won, stalled, or being lost. If it cannot be monitored, it cannot be managed. The visibility offered within the CRM system also allows management to make educated business decisions based on hard data. A CRM system will enable structured data to be used to access performance. This assessment should indicate which salesperson is out performing others.
How ProAptivity can help with Sales Incentive Plans
ProAptivity are an independent CRM solutions provider. We focus on the implementation, training, and support of highly customised CRM software solutions. Our CRM software supported by our sales training provide customers with the tools needed to deliver successful sales process management.
Fundamentally, we help organisations embed CRM best practice throughout their organisation. This helps organisations become more competitive, customer focused and ultimately more profitable.
If you need help in understanding why my business needs CRM, maybe some of our eBooks could help! Alternatively visit Maximizer CRM for more information. Contact us today in Belfast on 028 9099 6388 or at our Bedford office on 01234 214004. Alternatively email us on info@proaptivity.com. Contact us today for a free CRM consultation that will assess if your business is CRM ready.
Source: HBR
