It’s usually important to have the sales executive measured similarly to their sales team. So if the sales team’s primary measure is Revenue, then the sales executive should also have significant variable pay based on Revenue. But it’s also reasonable to hold the sales executive accountable for measures directly influenced by their team that are a bit closer to the income statement results, like Contribution Margin. Contribution Margin in a sales executive plan is generally defined as [Revenue] – [Cost of Goods at Standard] – [Directly Controllable Sales Operating Expense]. And that last one generally includes sales compensation and the expenses directly incurred by the sales team like travel and entertainment and possibly samples or other similar items. Measuring the sales executive on the same measure their team has is important for alignment, and the individual contributor sales people like knowing their leader shares their measure. But it’s also appropriate to hold the leader accountable for the marginal contribution of the group.
The next consideration is whether to include business unit or company level measures in the sales executive’s plan. If the sales executive is primarily accountable for sales results, and also sits on the leadership team for the business, then it may or may not be appropriate to include the same measure that you’d find in the comp plans for the rest of the executives. However, if the sales executive is more focused on the overall direction and strategy of the business as a key contributor to decisions affecting multiple functional areas of the business, it would be appropriate to have as much as half of their variable pay aligned with the same measures the CEO/President might have in their plan (EBITDA, free cash flow, etc.). And if the sales executive has a substantial role in the running of the business, then equity compensation in alignment with that offered the rest of the senior team should also be included.
Donya Rose, CSCP, is Managing Principal of The Cygnal Group. She is a recognized expert in sales compensation plan design, regularly speaking at conferences and writing published articles. She serves clients from F500 to growth-stage businesses, and advises WorldatWork on sales compensation hot topics and best practices.