Sue Barrett’s post on LinkedIn entitled “How to stand your ground and hold your margins” provides useful hints for the sales person in front of their customer, but could the dilemma be avoided through use of appropriate targeting?
The way in which commission schemes are designed should take full consideration of the behaviour they will encourage. As a general rule commission earned should be based on two basic principles:
The scheme should motivate the staff to modify their behaviour such that their efforts are fully aligned with the objectives and goals of the company.
- The scheme must be seen to reward people for their efforts and most importantly, reward them in line with their relative contribution.
- If commission is earned purely on revenue, what incentive is there to not give away discounts, which in turn impact on margin?
Likewise, if the sales force are not well informed on how prices are calculated and the underlying cost structure, then the impact of discounts and give-aways on margin will be less well understood.
Why might it be beneficial to use margin rather than revenue as the incentive?
- What keeps a business fed is the margin so by paying against margin you focus the sales people on what the business wants. When they are doing their deals they will be more appreciative of a discount’s impact on profitability as it also hits their pocket.
- Let’s assume you make 10% gross margin; so 10% of margin will pay the same as 1% of revenue. 10% is much more motivational than 1% even though it pays the same.
If you’d like some help with designing effective commission plans, and helping your team improve their negotiating to reduce need to discount, why not give us a call.