Capturing the Yeti: Calculating and Optimizing the ROI of Your Sales Incentive Plan
October 24, 2016
Much like the elusive yeti, the identification of Return On Investment (ROI) for a sales incentive plan is believed to exist by enthusiasts from the sales compensation design team, but met with much skepticism by others, namely the Finance department. So how do you prove the existence of ROI in your sales incentive plan proposal? Ultimately, it’s all about demonstrating that the sales incentive plan has a direct and measurable impact on sales behavior, resulting benefits and costs to the organisation.
So how do you measure the mysterious ROI of a sales incentive plan? For any sales incentive plan, the return on investment comes from increasing sales performance or reducing costs of the sales team. There will some contributory factors to sales performance apart from the incentive plan which need to be factored in. The reason for reducing per customer spend might be the result of poor customer service, the reason for a spike in sales might be the pricing strategy.
Incentive design clearly has a major influence. We look at 2 plan components: pay mix and defined metrics.
Pay mix: The pay mix of a sales incentive plan is the ratio of fixed pay to variable pay in a salesperson’s compensation. A plan with high base/fixed cost and a relatively low variable opportunity/cost (e.g. 80:20) encourages fairly conservative selling behavior and would be appropriate for account management in more mature, stable sales environments. The salesperson’s role is one tailored towards achieving profit margin, customer retention and realistic account growth . With this type of pay mix, the ROI is driven by cost control. If the paymix is too aggressive (e.g. 50:50), the company may end up overpaying for sales.
However, for young, emerging companies or brands with new product lines, sales behavior may be shaped by a compensation plan with low fixed costs and high variable costs (e.g. 50:50), putting the focus on the variable element. This encourages more aggressive sales behavior, and this type of pay mix would have an ROI measured in terms of revenue growth. If the paymix is more conservative (80:20), the salesperson will be more passive. Relative cost of sale goes up and ROI goes down.
Metrics: The metrics of your sales compensation plan will be the guidelines shaping the perspective on your ROI. These metrics must align with your business strategy to achieve company goals. If your plan is driving revenue growth, then your ROI will be in terms of level of growth being achieved or exceeded. If it has a gross margin element, it will be measured in terms of profitability. Other metrics for measuring ROI include both financial and non-financial:
- Market share
- Customer retention
- Brand reputation
- Cross-selling targets
- Salesforce attrition
Is your sales incentive plan crafted in a way that is strategically aligned to your business goals to deliver target ROI? Or is ROI lower than expected? Join us on November 3rd and 4th at the 10th Annual e-Reward Conference for an in-depth discussion of sales incentive plan design, measuring the effectiveness of sales incentive plans, and case studies of successful rewards strategy implementations. Register today!