A frequent question from business leaders and heads of finance is about the ROI on a sales compensation redesign. This is a quantitative question, and a very good one. To address it we first consider the three income statement lines affected by improved sales compensation plans:
- Revenue – Total sales volume can increase with the right incentives. And it can increase with a sales force that isn’t distracted by a complex comp plan and shadow accounting. Revenue can also be increased by focusing sales people on strategically important sales (right customers, right products, long term revenue streams, optimal contract terms, etc.).
- Margin – By focusing sales people on the most valuable sales and on correct pricing and deal structure, margin can be increased even if revenue is not.
- Cost – While this is not typically the focus of sales compensation plan redesign, the cost of comp can be managed down by paying less to sales people for the same productivity. More often costs are managed down by right-sizing the sales force, expecting sales productivity to increase faster than sales compensation. Other costs that can be managed include the cost of administering the plans, cost of delivering the company’s offering (reduced through better deal structure), and the cost of turnover in the sales organization due to un-motivating, unintelligible, or unfair comp plans.
The specific issues faced by the business will determine where the value creation can happen. Ask why you are considering changing the plans, what benefit you expect to gain. Most often, substantial changes in sales focus that yield transformed business results are attributable to a full program that is supported by the compensation plans. It is rare that compensation plan changes alone will make a dramatic difference on the income statement. It is also rare that a change in the market strategy, a change in sales roles, a new coverage model, or other important changes intended to create more effective selling will be successful without support from the sales compensation plans.
Sales compensation can be a very effective part of a sales change initiative, but is unlikely to yield transformative results and ROI in isolation. Similarly, a sales transformation effort that is not supported by aligned compensation plans is far less likely to be effective. So the ROI is usually best calculated based on the overall change initiative of which sales compensation is a part.
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.