Do you pay commissions on revenue or margin, or a bit of both? It depends. Many channel companies that live on razor thin margins, by necessity use margin (or gross profit, contribution margin) as the sole indicator of sales success. Most small business owners know you cannot pay the bills with revenue, it is all about the profit from the sale of your goods or services.
Larger companies, multinationals, and enterprise sized accounts tend to use revenue as the main indicator of sales performance. They do this for several reasons:
• The sales team may not have significant control of the margin part of a sale
• It is often easier to measure
• Sometimes they may not want the transparency of the margins that well known
The larger enterprise will typically task senior management (Directors and Sales VPs) with a split goal, looking to reward (motivate) both the top line and the bottom line. Of course, when you get out of a pure sales or sales management role, P&L responsibility is common and I would say necessary to achieve all the company financial goals.
Other typical and helpful components of a winning sales compensation plan will be:
• Milestones, gates and hurdles-minimum sales levels to achieve certain percentages of commission or bonus.
• Accelerators-paying for sales performance, motivating the team to overachieve by sometimes doubling or multiplying the normal commissions once the quota is achieved.
• KPIs (Key Performance Indicators), or other tactical tools to achieve specific results in a focus area.
The leadership team and especially the Vice President of Sales needs to remember that a compensation plan is not the sole management tool for the sales organization. Often times we see plans that were well meaning, but became overly complex as the organization tried to use the plan to dictate too much of the daily behavior of the sales organization. There have to be reasonable limits consistent with the key direction and goals of the organization…