At WorldatWork's recent Sales Compensation Forum, ¹HR/compensation professionals involved with the design of their company's sales compensation plans discussed the challenges of paying incentives (commission or bonus) based on profitability measures. Approximately 90 HR/compensation managers (of the 150 participants at the Forum) shared perspectives on their experience. The purpose of this Short is to summarize the "learnings" from those sessions.
REWARDING PROFITABL SELLING
In WAW's Third Annual Sales Compensation Practices Survey, 27% of the respondents reported that sales employees are paid incentive compensation based on a gross profit measure; that figure is 31% for front-lines sales managers. These findings represent a slight increase over results reported in the 2007 survey. We believe that a significant and growing number of companies are interested in rewarding their sales people for profitable selling because research shows that, on average, 30% of business is unprofitable.² In many cases, sales reps are in a position to improve sales profitability.
There are two basic ways a sales force can increase sales profitability: (1) sell more high margin products; and/or (2) reduce the discounts, allowances, non-compliance with contract terms, and other concessions (e.g., special freight charges) made on each sales. Getting a fix on the extent to which profit can be improved by either method at a particular company requires in-depth analysis. However, through our Forum workshop sessions, participants shared their companies' experience with profit based sales incentive plans and what they (HR/comp professionals) have done/can do to be helpful to management in this area so that others could learn from that experience.
PARTICIPANT COMPANIES' PRACTICES
The practices of companies represented by the participants in our Forum sessions are as follows:
¹ Sales Compensation Forum, WorldatWork Annual Conference and Expo, May 20, 2008, (Philadelphia)
² Jonathan, Byres, "Who's Managing Profitability", Harvard Business School
- Approximately 30% of the participants' companies use a profitability measure in sales rep and/or front-line sales manager plans
- Why companies don't use profitability measures:
- Don't know what constituents profitable sales
- SRs resist being measured on profitability
- Systems not in place to track/measure
- Most common profitability measures used*:
- Gross profit dollars
- Gross profit percent
- Contribution margin
- Product mix
- Overall profitability of line of business
*Customer definition of gross profit required
- Commons incentive techniques used to reward profitable selling:
- Bonus (based on profitability as one component of plan)
- Gate or hurdle to gain entry to payout on other plan components
- Payout multipliers (+/-)
- Credit multipliers
HR/COMP INVOLVEMENT
Our participants reported that HR/compensation involvement in helping Sales to move toward rewarding for profitable selling requires:
- In-depth knowledge of the business - understand markets, products, sales model, and sales financials
- Courage to challenge the status-quo
- Ability to "partner" with Sales leaders; be a "trusted advisor" to sales organization
- Skill and expertise to contribute to the "analytics" required to support use of profit measures (i.e., build the business case)
- Knowledge of incentive techniques that are appropriate to use
- Ability to contribute to change management, i.e., moving from no profit measures in place to plan(s) with profit measures - including communications for all sales employees; training for front line managers in how to manage with profit-oriented incentives
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