Calculating the ROI of sales compensation is not just an activity for the stuffy finance-types (with apologies to those finance-types).
It’s a critical measure of the success or failure of your sales compensation program, and perhaps even your sales strategy. We all know sales people are motivated by their compensation plan—they follow the money.
So, naturally, a well-designed plan drives the sales people to revenue growth far beyond the compensation cost of sales—or not. It’s important to know exactly what you’re getting, and whether or not it’s time for adjustments.
ROI has many definitions. The most common for sales compensation is: productivity value divided by the resource costs.
Sales Compensation ROI = Productivity Value / Resource Cost
Productivity values are measures derived from the compensation plan, including those beyond just financial metrics (customer satisfaction, product success, etc.). Resource costs are the financial costs invested in the compensation plans (including what sales professionals are paid and other investments like approval and crediting processes, talent acquisition in sales and support personnel, and tools and technology).
But beyond this common ROI calculation, there are seven essential questions (and two additional equations) to consider when calculating your sales compensation ROI.
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1. Why Will Our Organization Grow This Year? Define the Strategy & Business Objectives
Your sales strategy drives decisions on product focus, customers, and the go-to-market plan. Knowing and understanding this strategy will determine how your ROI definition is developed.
Strategy and ROI go hand-in-hand. The strategy needs an ROI to measure success, and an ROI needs the strategy to provide the direction of what should be measured. If one area changes, then the other needs to change as well.
For example, your company may be interested in focusing on a new product set. Metrics associated with the return on those facets of the business will drive your ROI definition.
2. How Will We Get There? Align the Sales Compensation Plan to the Strategy
Place specific elements in the plan that push the overall strategy. This seems obvious, but we see many sales compensation plans that don’t align—and often misalign—with the company’s strategy. Consider the following critical elements when building your sales compensation plan around your strategy:
- Appropriate roles and coverage
- Total compensation that’s competitive with the market
- Correct pay mix for each role
- Upside and thresholds (don’t be afraid to take from the under-performers and give to the over-performers)
- Simple measures that align with your strategy (the fewer the better)
- Mechanics, that include a connection between performance and pay
- Setting market-based quotas
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3. Where Will the Growth Come From—New or Current Customers? Define Productivity Value: “The Numerator”
Companies don’t grown in a straight line from year to year. They retain some customers and revenue, they lose some, and they gain some. Understand where your strategy predicts your revenue will come from, some combination of:
- Retention revenue from existing customers
- Penetration revenue (new revenue from existing customers)
- New revenue from new customers
These different revenue components demonstrate ways to redefine productivity value in terms of revenue. Company strategy will dictate which revenue component is most critical. There may be multiple ROI calculations if multiple revenue components are critical. For example, if new revenue is a focus, the ROI calculation would take new revenue divided by the resource cost specifically focused on new customer acquisition.
An example of this calculation is:
New Revenue ROI = New Revenue / (New Product Marketing Cost + New Business Sales Rep Comp + CRM Enhancement for New Products)
In addition, penetration revenue may be important for an account manager role. A separate ROI calculation could be used for this plan that divides penetration revenue for these accounts by account manager resource costs.
An example of this calculation is:
Penetration Revenue ROI = Penetration Revenue / (Account Manager Comp + Relationship Management System Build Out)
In the past few years, trends have moved away from revenue to profit or margin, specifically in the software industry. In a software company, license sales have very little direct cost to deliver, while services can have high costs to deliver. These businesses definitely want to look at margins. If sales professionals have latitude over pricing and have some level of control over costs, profit or margin may be an appropriate measure of success.
4. Who Will Achieve Our Goals? Determine the Resource Cost: “The Denominator”
Most companies define 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, two additional categories of resource cost are necessary.
The first 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, and make it easier for them to sell, including:
- Training and development programs
- 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
These costs can have a direct correlation to the productivity value in your ROI calculation.
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5. When Are the Crucial Milestones for Success? Set Expectations
The next step is to determine when you will define the measurement, 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. Does your organization expect a new sales rep to pay for himself/herself within 12 months? In absolute dollars, or as a percent of the organization?
6. Say What? Communicate the Plan
Success of the sales compensation plan and its ROI comes from full understanding by the sales team of how they can earn their maximum compensation. 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, dash-boarding, and coaching. 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?
7. What Else? Don’t Operate in a Silo
While the sales compensation plan is a huge factor on driving productivity, it doesn’t predict everything. When selling a strategic product, the sales compensation plan can motivate sales professionals to sell it, but other factors including product availability, the right markets, the right sales messages and process, and the appropriate sales personnel 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.