By Kevin O’Connell Managing Partner, Accelerate Consulting Group
Calculating the ROI on sales compensation is not just an activity for the stuffy finance types (with apologies to our friends in finance).
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 achieve revenue growth far beyond the cost of the sales compensation plan — or not. It’s important to know exactly what you’re getting, and whether or not it’s time for adjustments.
Sales Compensation ROI = Productivity Value / Resource Cost
ROI has many definitions. The most common for sales compensation is: productivity value divided by the resource costs.
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 sales comp plan administration, talent acquisition in sales and support personnel, and sales tools and technology).
That’s where the wheels can start to fall off the cart. Not all companies have the ability to track the expense items that should be allocated to calculate a precise ROI. But that is not the point, it’s better to have a ‘directionally correct’ ROI calculation than none at all.
Some guidelines to consider:
- It’s best to calculate sales compensation ROI by sales role. This provides flexibility to adapt the components for the numerator and denominator to best fit the sales job. Different sales roles typically have different sales compensation plans. A single ROI % might be just too simplistic to determine how the investment in sale compensation measures up.
- Use the revenue or profit credited to payout sales incentives. Otherwise you will likely overstate or understate the return. For example, if total revenue includes house accounts which are excluded from incentives, the ROI would be higher than what it actually is.
- Benchmarks are just that – standards or reference points to assess how you are doing. In general, we find well designed sales compensation programs are a very good investment providing an excellent ROI. It is worthwhile calculating sales compensation ROI twice in order to compare the actual return at year-end to budget or plan ROI at the start of the year.
We have seen sales compensation ROI calculations that run the gambit from very simple (revenue ¸ sales compensation expense) to very complex with multiple line items included in the productivity value or numerator and the resource costs or denominator.
You have likely heard “the sales compensation plan pays for itself”. That can be proven by using a net productivity value (i.e., productivity value – sales comp expense) when calculating ROI. Any positive result supports the self-funded claim.
Calculating sales compensation ROI is a good practice to get into. Regardless of how sophisticated or limited your capabilities are, the exercise provides discipline in designing and managing sales compensation programs. It also provides a yardstick to hold sales executives and other potential key stakeholders (e.g., finance, human resource, and sales operations) accountable for effectively managing one of the company’s largest investments.