© Copyright 2014 The Sales Management Association. Sales Management Association Webcast 6 November 2014 Presented by Sales Compensation Plan Designs That Improve Profitability – 3 Case Studies
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© Copyright 2014 The Sales Management Association.
Sales Management Association Webcast
6 November 2014 Presented by
Sales Compensation Plan Designs That Improve Profitability – 3 Case Studies
About The Sales Management Association
Slide 2
© 2014 The Sales Management Association. All rights reserved.
A global, cross-industry professional association for sales operations and sales management. Focused in providing research, case studies, training, peer networking, and professional development to our membership. Fostering a community of thought-leaders, service providers, academics, and practitioners.
Learn More: www.salesmanagement.org
Today’s Panelists
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© 2014 The Sales Management Association. All rights reserved.
© Copyright 2014 The Sales Management Association.
Sales Management Association Webcast
6 November 2014 Presented by
Sales Compensation Plan Designs That Improve Profitability – 3 Case Studies
#SalesCompDesign
Before You Start!
What considerations should you keep in mind before designing plans?
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Profitability: ICM Considerations
• Define objectives of your plan • Plan how to move from current plan to
desired state • Select the right performance measures • Communicate the objectives of the
performance measures
Slide 6
Plan Approach: Foundational Principles
• Increased profits are the goal • Create shareholder value • Profit targets and shared definition are
critical • Reward the right behavior (KPI’s)
Slide 7
The Best Profitability Measure
How should we define and measure “profit” when judging or compensating salesperson performance?
Slide 8
Profit Measurement
• Determine participants • Define profits • Profit must be in salesperson control • Benchmark current profits, and review
challenges to create threshold • Determine if tiers are appropriate • Use KPI’s to influence the right behavior
Slide 9
Case Studies Three approaches in common use today. I. Simple commission on sales
revenue (single offering) II. Commission in a multi-offering
environment III. Incentives plan in a channel-
intensive environment
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Case Study I
• Simple 4.0% commission on sales • Past emphasis on sales growth • Typical salesperson closes 10 deals per year,
generates US$1.5 million in annual sales • Gross margin averages 30.0%, and ranges
between 18.0 and 38.0% • Sales Managers approve each deal, and receive
override commissions on revenue
Slide 11
Case Study I
• Why change the plan now?
Sales CR% (on sales) Commission @ 19% GM% @ 30% GM% @ 38% GM%1,000,000 4.00% 40,000 190,000 300,000 380,000 1,500,000 4.00% 60,000 285,000 450,000 570,000 2,000,000 4.00% 80,000 380,000 600,000 760,000 2,500,000 4.00% 100,000 475,000 750,000 950,000
Gross Margin $
Slide 12
Case Study I Option A • Change commission to pay a percentage of gross
margin dollars, instead of sales
Option B • No change to salesperson pay • Change SM pay to heavily emphasize profit percentage
Option C • Use quota-based pay for salespeople and SM • Quotas are based on GM$
Slide 13
Case Study I
Option A • Change commission to pay a percentage of gross
margin dollars, instead of sales
Sales CR% (on GM$) @ 19% GM% @ 30% GM% @ 38% GM% @ 19% GM% @ 30% GM% @ 38% GM%
1,000,000 13.33% 190,000 300,000 380,000 25,333 40,000 50,667 1,500,000 13.33% 285,000 450,000 570,000 38,000 60,000 76,000 2,000,000 13.33% 380,000 600,000 760,000 50,667 80,000 101,333 2,500,000 13.33% 475,000 750,000 950,000 63,333 100,000 126,667
Gross Margin $ Commissions
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Case Study I Option B • No change to salesperson pay • Change SM pay to heavily emphasize profit percentage
Old plan: SM earns override commission equal to 1/8 of salesperson commission. New plan: • No SM compensation if team GM% is below threshold • Limited incentive for team GM% over threshold, but
below target • Highly accelerated incentive if team GM% is over-target
Slide 15
Case Study I
Option C • Use quota-based pay for salespeople and SM • Quotas are based on GM$
Annual GM$ quota: $450,000 Incentive earnings at quota: $60,000
Slide 16
Case Study II
• High Technology Company offering hardware, software, and services
• Tiered commission and accelerators on sales revenue (single rate for sw, hw, services)
• Quarterly MBO bonus for “soft” objectives
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Case Study II Current Situation
• Partner driven sales are lower commission vs manufacturer sales
• No KPI’s to influence behavior • Profit Margins are on decline
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Case Study II Profitability Plan
• Specific profit margin levels for HW, SW, SVCS
• Benchmarked against past history • Targeted to drive margin objectives • Tiers drive the combined profitable mix • Minimum sales levels created for “lagging
products” SVCS in this case • 110% payout for partner created services
Slide 19
Case II Plan Comparison
Tier From To Payout Tier From To Payout1 25,000$ 50,000$ 2% 1 5% 15% 20%
2 50,001$ 100,000$ 3% 2 16% 20% 22%
3 100,001$ 150,000$ 4% 3 21% 30% 24%
Tier From To Payout Tier From To Payout1 25,000$ 50,000$ 2% 1 20% 30% 30%2 50,001$ 100,000$ 3% 2 31% 40% 35%3 100,001$ 150,000$ 4% 3 41% 50% 40%
Tier From To Payout Tier From To Payout1 25,000$ 50,000$ 2% 1 15% 20% 25%2 50,001$ 100,000$ 3% 2 21% 30% 27%3 100,001$ 150,000$ 4% 3 31% 40% 30%
Software Plan Setup
Services Plan Setup
Payout Type Payout Type% of Revenue % of Margin
Existing Plan Improved PlanHardware Plan Setup
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Case II Margin Impact SW
Margin Contribution HW Comparison
Sales Revenue 100,000$ 100,000$ 100,000$ 100,000 Company Margin % 15% 18% 21% 15.0% Average Margin % Margin $ 15,000$ 18,000$ 21,000$ 15,000$ Commission % of Margin 20% 22% 24% 3.0% Commission %/revenue Salesperson Commission 3,000$ 3,960$ 5,040$ 3,000$ Company Net Margin 12,000$ 14,040$ 15,960$ 12,000$
Existing PlanImproved Plan
Slide 21
Case Study III
• Chemicals Manufacturer • 200+ generalist sales reps, very tenured • Multi-channel approach to market – direct
to large enterprise, through resellers to mid-market, two-tier retail distribution to consumers
• Currently paid on revenue and MBOs
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Case Study III Current Situation
• Revenue has been growing, mostly in the mid-market
• Gross Profit has also declining recently, tracking average selling price downwards
• The company has a stated “channel neutral” philosophy, grossing up revenue for indirect channel business
• More business has been shifting to indirect
Slide 23
Case Study III Channel Model
Enterprise Customers Price $100
Mid-‐Market Customers Price $100
Consumer Customers Price $100
Retailers $15 Mark-‐up
Resellers $25 Mark-‐up
Distributors $15 Mark-‐up
Direct Channel Average Price $100
Reseller Channel Price $75
Two-‐Tier Retail Channel Price $70
Slide 24
Case Study III Profitability Plan
• The company created rules of engagement to specify the appropriate channel for each customer segment
• The company created more specialist sales roles to focus on a segment/channel combination
• Gross-up of revenue credit for indirect channels was discontinued
• Quotas were set using the appropriate discounts and crediting ration for each channel
• MBOs were revised to focus on value-add programs that would boost the profit of each channel
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Questions and Discussion
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© 2014 The Sales Management Association. All rights reserved.
In the final example, the GTM changes were just as important as the pay plan. How often is that the case?
Questions and Discussion
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© 2014 The Sales Management Association. All rights reserved.
How long does a transformation in pay plans require? What other considerations are there for significant changes in pay?
Questions and Discussion
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© 2014 The Sales Management Association. All rights reserved.
Our firm’s pricing plans are so complex it makes measuring profitability almost impossible. Is there a way around that?
© Copyright 2014 The Sales Management Association
Thank You.
Simple Commission Plan
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© 2014 The Sales Management Association. All rights reserved.
Field Sales $60K Base + Commission
$1.5M 4.0% $60,000
Sales x Commission Rate
= Commission
$60,000 + $60,000 = $120,000
Base Commission Total Comp
Sales Manager $90K Base + Override Commission
$9.0M 0.5% $45,000
Sales x Commission Rate
= Commission
$90,000 + $45,000 = $135,000
Base Commission Total Comp
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