By Mark Donnolo
If you’ve ever been involved in designing a sales compensation plan, you’ve probably heard these questions:
- How much is the sales compensation plan going to cost us this year?
- Is this a good investment of our money?
- What should we expect back?
There are several hot-button issues that drive ROI:
- The amount we’re going to pay in the market.
- The pay mix: the amount we’re going to pay in fixed versus variable costs. Some CFOs debate how much money they actually want to commit rather than tie to performance. Another common debate between CFOs and sales is why we can’t put more pay at risk and have less fixed pay.
- The upside and threshold. How much are we going to pay our top people and how little are we going to pay our bottom people? Do we employ the Reverse Robin Hood Theory, which takes from the underperformers to pay the overperformers?
- The mechanics. Accelerators are a driver of costs and ROI.
- How we set our objectives and goals, relative to target pay, and how we allocate those goals to the organization. What we expect back is a big driver of ROI.
When determining the ROI of your own sales compensation plan, we recommend considering several drivers around ROI.
- Determine your strategy and the business objectives you are trying to achieve. Understanding, for example, that we want to grow a certain product group or develop a certain market may change the way we look at ROI. We may be willing to invest a bit more to develop this market than we would on average or in our traditional markets. Isolate and evaluate ROI uniquely for that market.
- Define how the sales compensation plan can help drive that strategy, and where its limits are. The sales compensation plan doesn’t control everything. If we were going to sell a strategic product, we know the sales compensation plan can motivate people to sell it – but there are other factors such as availability of that product, targeting the right markets, the right sales messages, having the skill in the sales organization to do that, and having the right sales processes. A lot of other factors will play into whether we can actually accomplish that objective, in addition to the sales compensation plan. When we attribute success to the sales compensation plan because it helped us achieve certain objectives, often we have to understand that sales comp was just one piece of it.
- Determine who you will pay. We might look at ROI a little bit differently this way as well. We might consider certain sales groups that were able to help us achieve that growth objective, versus the whole population. We can then look at the ROI on them.
- Decide how much to spend. We recently worked with a media company that traditionally sold TV advertising, and they wanted to increase their cross selling of online advertising. That’s a sales strategy; that’s an objective. What could the plan do? They wanted the plan to help them get a 10 percent average attach rate to their core product. Their television advertising will have a 10 percent attach rate of online advertising. They stated what they wanted to happen; next, they examined who would do it and who would bring in the return on their investment.
They looked at the TV sales organization. They would be selling that online inventory cross-platform. So now they knew who they were going after. What were they going to pay? They expected an incremental spend of about 15 percent of the first year’s contracted program revenue. So this company basically took that idea and converted it into a statement.
It sounds ironic but, when considering sales compensation ROI, move any focus away from the number. Take the focus – and the argument – away from the number and break down the components driving that number; then, the conversation is simply a lot more productive.
Mark Donnolo is the managing partner at SalesGlobe and the author of The Innovative Sale and What Every CEO Needs to Know About Sales Compensation.