Pay on profit or revenue

Its been too long since I’ve blogged.  Lots of good things going on with QuotaCrush, plus the holidays have kept me away, but I have several topics on which I want to write about and I am goign to be more diligent with sitting down to write. 

In the mean-time, an interesting question has come up recently with two different clients about what should be the basis for commission on which I thought I would write a mini-post.  Should you pay based on the amount of profit that the sales produces – or should you pay based on the amount of revenue that the project produces.

In general, I always advocate that the goals of the compensation plan must match the goals of the company.  When these two objectives are in alignment, then the salesteam can be very productive, and everyone wins.  When these items are mis-matched, frustrations on both parts are likely to happen.

So, the question that you need to ask youself in order to answer this main question is:  What is your objective for sales this year?  Is it revenue or is it profit?  While this seems like a silly question, in fact is isn’t.  Companies, particularly the start-ups that I work with, often have a need to generate marketshare and anchor clients.  Companies may be willing to take certain clients at any cost just to have them as a client – and often certain products are loss leaders needed to get companies started before they get the more expensive products.

Once you know what you as a company want to achieve, then you can set your goal appropriately.  When you set it incorrectly, your salesteam gets frustrated and de-motivated.  For example, in one of my sales jobs, I was in the process of landing P&G as a client.  P&G, for most companies, is such an amazing anchor account, that most would do whatever they could to get a deal with them.  Ultimately, this is what my management was telling me to do.  In fact, they had me present a proposal that included a gaggle of free services.  I was able to land the account, but got nearly no commission on the deal because my compensation was based on profit – not on revenue – and once you factored in the free services that we had to offer, the profit was squeezed out of the deal.  I managed a sell few follow on deals which did generate me some commissions – one a rather large deal – so wound up OK, but the bottom line was a disgrunted salesperson for quite a while because I was doing an awful lot of work for no commission.  Had the company really thought about what they were asking me to do, they could have re-worked the compensation so that I was whole on this deal because they wanted it so badly.

With both clients that I talked to about this recently, my advice was to pay on the revenue that was generated rather than profit, because both clients were in desparate need of marketshare in their regions.  My theory was that if they had the salesperson focused primarily on profit, yet the goals of the company were to gain a client base and some marketshare that the goals were mismatched.  The company position might be that they would be willing to take a client at any price above a loss (and perhaps even some special situations at a loss), yet a salesperson would see that deal as an unworthy effort. 

I asked the question, “What will you think if a salesperson walks away from a deal because there isn’t enough profit for them to make any commissions?”  If the answer is any angst over the salesperson’s decision, then they should be paying on revenue – because its obvious they want sales that even produce a small amount of profit.  If the answer is that they would be happy with the salesperson’s decision, then they can commission on profit alone.  That will ensure that the salesperson only goes after deals that generate a significant amount of profit.