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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
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About The Sales Management Association
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© 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
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Today’s Panelists
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© 2014 The Sales Management Association. All rights reserved.
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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
#SalesCompDesign
![Page 5: Sales Management Association Webcast Sales · PDF fileAbout The Sales Management Association ... • Benchmark current profits, and review challenges to create threshold • Determine](https://reader034.vdocument.in/reader034/viewer/2022051723/5ab393277f8b9a00728e3486/html5/thumbnails/5.jpg)
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
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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)
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The Best Profitability Measure
How should we define and measure “profit” when judging or compensating salesperson performance?
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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
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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
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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 $
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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$
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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
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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: $60,000
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Case Study II
• High Technology Company offering hardware, software, and services
• Tiered commission and accelerators on sales revenue (single rate for sw, hw, services)
• Quarterly MBO bonus for “soft” objectives
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Case Study II Current Situation
• Partner driven sales are lower commission vs manufacturer sales
• No KPI’s to influence behavior • Profit Margins are on decline
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Case Study II Profitability Plan
• Specific profit margin levels for HW, SW, SVCS
• Benchmarked against past history • Targeted to drive margin objectives • Tiers drive the combined profitable mix • Minimum sales levels created for “lagging
products” SVCS in this case • 110% payout for partner created services
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Case II Plan Comparison
Tier From To Payout Tier From To Payout1 25,000$ 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
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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
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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
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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?
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Questions and Discussion
Slide 27
© 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?
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Questions and Discussion
Slide 28
© 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?
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© Copyright 2014 The Sales Management Association
Thank You.
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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