Sales Commission - What Return Should You Expect On Your Sales Compensation Investment?
This article answers the following questions:
- How do most companies look at return on investment (ROI) for their sales compensation expense?
- What portion of sales compensation expense do companies allocate to managing existing accounts versus pursuing new accounts?
- Do most companies expect their salespeople to generate new, additional gross profit each year that is equal to or greater than their compensation?
One conclusion I have reached after working with many different kinds of companies is that there is little commonality in how they establish the desired return on investment (ROI) from their sales compensation investments. Every company's circumstances are different; as a result, what might constitute an acceptable ROI for one company will not be considered acceptable by another company.Here are some questions to consider as you determine the desired sales compensation ROI for your company, and how that ROI should be split between existing accounts and new accounts:
- What is the value of each sales dollar produced? Is the value different if a sales dollar is produced by an existing account versus a new account?
- How does the time and effort required to maintain (and grow) existing customers compare to the time and effort required to bring on new accounts?
- Do accounts operate pretty much on "autopilot" once they have been brought on board, or must your salespeople continue to invest significant effort (in terms of internal prospecting, opportunity qualification, proposal generation, relationship management, etc.) to maintain sales volume and profitability?
- Once an account has been brought on board, can ANY salesperson manage the relationship, or is there something special about the relationship that exists between the current salesperson and the account?
I have seen cases where management held the opinion that ANYONE could manage and maintain the volumes of business that were being produced by major accounts. They questioned why they should continue paying high compensation to the salespeople who were managing those accounts.In some cases management chose to reduce commission rates, which caused the salespeople who had been managing the accounts to leave the company. In other cases management simply switched account assignments and assigned less "expensive" (in terms of compensation) salespeople to the major accounts. Far too often the outcome from either approach was a slow decay in revenue that eventually added up to millions of dollars in lost sales.
Why did this decay in revenue occur?
Close inspection identified two key reasons:
- The replaced salespeople had enjoyed truly special relationships with key players in the accounts. The key players' loyalty was to the salespeople, not the salespeople's employers. When the salespeople left, the key players saw little reason to continue to favor the salespeople's (previous) employers with their business.
- The replaced salespeople were extremely responsive and provided extraordinary levels of service. In some cases these salespeople were unusually successful in navigating their employers' informal networks. This enabled them to solve problems and do favors for their customers with a timeliness that other salespeople could not match.
If you determine that some of your salespeople DO have enough bandwidth to bring on new accounts, here are questions to consider as you set their "new business" goals:
- What level of market penetration has your company achieved to date?
- How much additional market penetration can your company reasonably expect to accomplish within a specified time frame?
- How many potential prospects exist in each sales territory?
- How do these potential prospects compare to your existing customers in terms of revenue potential?
- How many new prospects will a salesperson need to close to make any appreciable difference in their numbers?
Here are some final questions for you to consider:What percentage return are you currently receiving on your sales compensation investments?
Do your salespeople produce multiples of their compensation in terms of profits back to your company?
Is it really reasonable to expect your sales compensation ROI to grow every year?Conclusion
The questions asked in this article can help you determine the desired return on your sales compensation investment, plus develop targets for ROI from existing accounts and new accounts. Don't let the fact that some salespeople earn high compensation cause you to set your ROI goals too aggressively. Instead, focus on the question, "How much return do we receive on the sales compensation we pay?" A solid return on your investment means you are completely justified in making that investment!
Copyright 2005 -- Alan Rigg
Sales performance expert Alan Rigg is the author of How to Beat the 80/20 Rule in Selling: Why Most Salespeople Don't Perform and What to Do About It. His company, 80/20 Sales Performance, helps business owners, executives, and managers DOUBLE sales by implementing The Right Formula
