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Is it Time to Introduce Profit Margin in Your Sales Incentive Plan?

November 28, 2018  |   Sales Incentives,Uncategorized   |     |   Comments Off on Is it Time to Introduce Profit Margin in Your Sales Incentive Plan?

BCR-BlogThe answer to this question is unique to every organization. A sales incentive plan based on profitability is not the solution for all companies and needs to be supported by the overall corporate strategy.

Here are a few questions to consider as you further explore whether it’s the right time to introduce Margin as a metric into your sales incentive plan:

What is your organization’s strategy?
– If you introduce profitability into your sales incentive plans, you’ll want to make sure the sales organization isn’t alone in their focus on profitability.
– Are you comfortable with sales representatives shifting their focus away from Revenue as they target deals with higher levels of margin?

Where are you in the business life cycle?
– If you’re in start-up company mode then you’re probably focused on increasing sales revenue.
– As your company starts to mature, you may want to focus on increasing profitability.

Do your sales representatives have the ability to influence profitability?
– Do your sales representatives have the ability to adjust price either by discounting or bundling products?
– How will sales representatives increase profitability?

• Price increases
• New business
• Upsell/cross-sell existing customers

Do you have the ability to accurately calculate margin by invoice or account?
– It’s important to provide the sales organization the visibility to the margin dollars for each transaction so they can calculate their commission and/or bonus payouts.
– Can you set profitability goals accurately to ensure top and low performers are rewarded appropriately?

Margin as a Metric

If you decide to introduce Margin as a metric in your sales incentive plan, there are other factors to consider when designing an effective sales incentive plan.

• Keep it simple — Incentive plans that are simple are easier to understand, can be clearly communicated and reinforced.

• Performance measures are limited to those most aligned with desired results and/or behaviors.

• Level of pay at risk or pay mix is appropriate to the sales role.

• Pay and performance are aligned – the opportunity or leverage (the amount of upside above target total compensation) for premium pay motivates exceptional performance.

• The choice of a commission versus a bonus mechanic is driven by business needs, i.e., product life cycle, market characteristics and the need for flexibility.

• The timing for payout should be more closely correlated with the performance cycle.

Communication is a must when introducing a new metric into your sales incentive plan. It’s not uncommon for companies to ask more from their sales force, but they need to understand exactly what you’re asking them to do and how this may or may not change their sales process. You’ll also want to think through some of the intended and unintended consequences.

Contact Us

BCR has a great deal of experience in working with organizations to introduce Margin as the primary metric of their sales incentive plans. Reach out to us and we can discuss how we can assist your organization with the do’s and don’ts that lead to a successful transition.

Written by: Erik Berman, BCR Consultant

BCR is a local, minority-owned firm with more than 25 years experience in serving non-profit, public, and privately held entities in the key areas of Benefits and Compensation Consulting, Performance Management, Human Resource Organization Development, and Human Resource Information Systems and Processes.

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