With over 100 billions spent annually on sales incentives in the US alone, managing the overall cost of your sales incentive program is critical to your bottom line. In this blog post, we describe different ways to manage total spend for sales incentives.
Not A Tax On Your Business
Many organizations control the cost of sales commissions by treating sales commissions as a tax they are willing to pay on revenue. For example, they could decide that an 8% sales commission “tax” is tolerable. However, there are several issues with this approach:
- It does not include the cost of base salaries or benefits
- It does not ensure sales rep compensation remains competitive
- There is no precise way to determine which percentage is tolerable
One solution is to reverse the approach. Instead of seeing commissions as a tax, start from a total target compensation for your sales reps, and walk backwards. For example, you could decide that for senior BDMs, the pay mix should be 50% base salary / 50% sales commissions for a total of $120K. As a result, on-target sales commissions would be $60K (annually) per senior BDM.
Next, decide which sales results you expect for on-target compensation – for example, 1 million in sales. Based on this, a revenue-based sales commission program would pay 60K / 1 million = 6% of revenue on average. As you can see, this approach addresses issues listed above, while making costs more predictable by basing them on a cost of labor. Note that if you are going to pay multiple reps for a single sales transaction (ex: split commissions), make sure to account for this as well in your calculations.
Most incentive plans have different quotas or attainment thresholds. They may have accelerators. They may include SPIFFs. They may be based on revenue, profit, or even another metric such as scoring. In addition, you typically have a plan for each role, or even seniority level. This is a lot of complexity to manage. You have so many parameters and “knobs” to play with that measuring the impact of each on total spend becomes difficult.
One of the best way you can predict overall spend is to create different plans and run simulations. You can then analyze attainment levels and total spend under different scenarios or models. Next, you can fine tune parameters until you get a stable model with an acceptable spend profile. Finally, you can deploy this incentive model to your team with the confidence that total cost will be manageable.
Sales Cookie includes the ability to run simulations by selecting transactions at random from past ones, and replaying them (akin to a monte-carlo simulation). For example, you can have the system pull samples from your most recent 1000 sales transactions. We’ll automatically select the right number of transactions based on current sales trends and your chosen period. For example, if your trend is 250 transactions per month, each simulation will pull 250 transactions at random from your most recent 1000. We’ll then run transactions through competing plans so that you can choose the best model.
Most plans should not include caps because they can demotivate your sales team. Caps can cause your reps to no longer feel that they could “win the lottery” if they perform extremely well. However, there are some scenarios where establishing (high) caps can make sense, help protect your plan from anomalies, and avoid excessive variability.
One type of cap is to base incentive plans on profit instead of revenue. This allows you to protect your margins, and stop over-paying sales commissions for large deals with razor-thin profit caused by excessive discounts. Alternatively, you could enforce rules such reduced commission rates for larger discounts. Make sure to choose a sales commission management solution which supports all those options.
In some cases, you may want to configure explicit caps. We support the following options:
- Per-transaction cap. For example, you could indicate that any deal larger than $250K will be treated as worth $250K. This can help you protect your plan from anomalies such as mega-deals. You can still manually override and authorize a commission after review.
- Per-individual cap. For example, you could indicate that no individual should receive more than $200K in sales commissions. Or you could choose to set a limit per-individual based on their salary. For example, you could specify that sales commissions should never exceed 300% of base pay.
- Per-plan cap. For example, you could indicate that your plan should never pay more than $10 million in sales commissions overall. If this limit is exceeded, we will automatically re-calculate rewards for each beneficiary based on their original assigned amount. This essentially re-assigns sales commissions so that they don’t exceed the limit.
We hope these 3 options can help you better control the cost of your sales commission program – after all, it is one of your largest investment. We also encourage you not to see sales commissions as a tax, but rather as something to optimize so as to maximize sales motivation. Investing in an automated sales commission management solution can be one of the best investment you can make it terms of controlling costs.