This is the second in a two-part series of Sales Compensation ROI. Click here for Part I.
Step 4: The Who? Determine the Resource Cost – “The Denominator”
To keep it simple, companies have defined their resource costs as base salary plus incentive pay excluding benefits, or actual total compensation. At SalesGlobe, we call this the surface-level ROI as it is fails to understand the influence of other elements necessary in the overall sales compensation program. This is the biggest moving piece in ROI calculations across companies. Through our client work and interviews, most companies use the surface-level ROI defining their resource cost in one of three ways:
- Bottoms Up: Total actual cost of sales compensation (base salary plus incentive, excluding benefits).
- Top Down Amount: A flat dollar amount based off history or projected analytics.
- Top Down Ratio: Percent of projected sales.
These are all valid approaches to determine the resource cost used in the ROI calculation. However, we propose two additional categories of investment to surpass the surface level ROI. The first category is to align specific resources to a specific growth objective. For example, if the objective is to retain revenue from the top 20 customers, the company may align resource costs such as account managers, reporting and tools that specifically help achieve that objective. A ROI would be measured on that specific breakout of resource costs and productivity value. The second category is the non-compensation factors that allow sales personnel to optimize their productivity, thus making it easier to sell. This would include:
- Training and development programs and resources
- Sales leadership resources
- Recruiting / talent acquisition resources and processes
- Sales operations resources
- Crediting, approval, and quota setting processes
- Real-time reporting tools such as performance analytics and pay estimators
- CRM and compensation administration systems
- Territory management
These costs can have a direct correlation to the productivity value in your ROI calculation.
Step 5: When? Setting Expectations
In the previous steps, we walked through the framework and considerations for the productivity value (numerator) and the resource cost (denominator). Now that the measurement is defined, the next step is to determine when we will define it, over what time period, and how often. In addition, expectations should be set regarding the look of the reporting, the distribution, and definitions of success.
A CFO from a conferencing software client measures the ROI of new sales professional over a 12-month period. The ROI calculation is the individual’s annual revenue divided by his/her total compensation excluding benefits. Instead of calculating as percent, the company uses an absolute dollar value comparison. The expectation is that the sales professional should be paying for himself within that 12-month period. However, these guidelines do change based on the sales professional type (small accounts versus major accounts), level within organization, and annual revenue responsibility. This definition has been consistent for several years and is simple such that all sales employees can calculate their own ROI. Compensation plan changes can impact a sales professional’s behavior quickly, so it is important to have a process in place to measure the appropriate ROI early and often.
Step 6: What? Communication Plan – Speak the Same Language
Many stakeholders are involved in defining and creating a sales compensation ROI – sales, sales operations, human resources, finance, etc. Getting all stakeholders to speak the same sales compensation ROI language is an iterative and on-going process. This is one of the more challenging tasks during sales compensation design. In general, the sales or sales operations teams will own the design. However, finance manages the budget and plays a significant part in the process. In order to capture full engagement of the sales team, everyone should have a full understanding of the strategy, sales compensation plans, and ROI components. We often conduct field interviews for our market studies and receive responses such as, “I don’t know what I will earn until the check appears through my direct deposit,” or, with regards to strategy, “We have one, but I do not know what it is.”
Success of the sales compensation plan and its ROI comes from full understanding by the sales team. To achieve success, company leaders need to reinforce the strategy message outside of the compensation plan through frequent feedback loops such as forecast reviews, frequent questioning of results, metrics, dashboarding, and coaching. All stakeholders must be in sync with the strategy and compensation message in order to accomplish this. In order to ensure the ROI process and results are communicated effectively, the audience should be able to answer three questions:
- How do we measure success or effectiveness of our resources?
- How much is the sales compensation plan going to cost us?
- Have we achieved success based on our results?
Clarity of the above ensures that the company has alignment between optimal sales resources and organizational priorities, which can lead to maximizing returns and sustaining organizational and individual performance. In simpler terms, everyone wins.
Step 7: What Else? Don’t Operate in a Silo
A part of your ROI success or failure will come from factors that are outside the control of the sales compensation plan. No matter how well you define your strategy, design your sales compensation plan, and determine your ROI measures, other influences will be there. Your success may also be a result of marketing efforts, new products, change in competitive landscape, or customer satisfaction levels. Companies must analyze the whole picture, not just the sales compensation plan in a silo – you must analyze product, market, and customer readiness as well in order to ensure success. A great sales compensation plan without these readiness factors risks failure from a ROI perspective. While the sales compensation plan is a huge factor on driving productivity, it does not predict everything. When selling a strategic product, the sales compensation plan can motivate sales professionals to sell it, but there are other factors such as product availability, the right markets, the right sales messages and process, and the appropriate sales personnel that contribute to that product’s success. Attributing success to the sales compensation plan because it helped achieve certain objectives often comes with the understanding that sales compensation was just one piece of it.
Sales compensation is one of the single largest expenses a company incurs. Maximizing the impact of the investment is critical to gaining a competitive advantage. We find it very useful to move focus away from the number. Take the focus – and the argument – away from the number alone and break down the components driving that number. Then, the conversation is a lot more productive. The key points from the chapter to remember are:
- Strategy and ROI go hand-in-hand. The strategy needs an ROI to ensure success and an ROI needs the strategy to provide direction of what should be measured. If one area changes, then the other one needs to change as well.
- Take the time to define your ROI. Take some time in your compensation planning process to determine your best objective definition of ROI and stick to it as long as it continues to align with your strategy. Include all stakeholders to research, build, communicate, and sustain it. You will see the benefits.
- Look beyond traditional measures of ROI. Push your thinking to incorporate elements of productivity value and resource cost outside of the simplest measures. There are many factors that contribute to the success of your sales compensation plan. Consider them in your ROI so that you can adapt them to your benefit.
- Numbers can lie. To ensure the ROI is credible, it is imperative that the framework and components are broken down in simple, non-financial verbiage. The process should be consistent from period to period to maintain objectivity and consistency in the message.
- Conflict will exist. The framework we outlined cannot be done in a silo. In general, sales, sales operations, finance and HR are the key players at the table. Each function has its own priorities, challenges, and opinions. It is vital to consider the perspective of each party. For example, finance wants better results with less money, while sales wants to attract and retain the best talent without a price tag. HR can help by providing external benchmarks minimizing this conflict. Sales operations can provide reporting with objective evidence of a particular issue at hand.
- ROI is not one size fits all. The metrics for ROI will vary by sales strategy, customer type, product mix, role type, contract length, and revenue type. Also, several ROI calculations may be needed depending on the structure of your sales team and strategy components.
- ROI is not one and done. While financial statements are issued annually, the sales compensation ROI is an on-going process. The framework of the productivity value and resource cost may not change from period to period, but the components need to adapt to rapidly changing business needs and strategy. Keep it simple so that you can adapt quickly.
Next week I’ll write about three strategies of revenue growth. Contact me at firstname.lastname@example.org with any questions.