It may sound like a simple enough equation but how to measure sales performance? Is it only gross profit?
How Much Are My Salespeople Worth?
It may sound like a simple enough equation but how do you calculate a salesperson’s worth to your business? Is it as simple as measuring the amount of gross profit they contribute?
That might work if you have only one salesperson on your team but what if you have multiple teams selling different products or services with different gross profit margins in different markets or territories? Measuring sales performance and therefore calculating the worth of your sales team becomes a more complex equation. And once you’ve calculated their worth, how much do you pay them as a reward?
How To Measure Sales Performance
Sales Performance Metrics
To measure sales performance, many businesses start with setting a quota. A salesperson’s worth is measured according to their ability to achieve their sales target. It sounds simple, right? Once they reach their target you pay them a percentage of the additional gross profit they generate. But what type of culture will you breed if you reward salespeople individually for the money they bring in? Will it recognize the contribution of all team members towards making that sale? Will it encourage long-term profitable customer relationships or once-off bluebird deals?
In the Harvard Business Review article The Twelve Sales Metrics that Matter Most, the authors suggest a broader perspective on measuring sales performance. Factors such as whether the role is internally or externally facing, the length of the sales cycle and whether the role focuses on new business versus repeat business are all considerations.
Most people have experienced working with the ego-driven maverick. These people often wreak havoc and expect others to clean up the mess, excusing their behavior because they are a ‘high achiever’. Not many businesses can support a maverick and businesses have to question how much they are worth by comparing their contribution versus what they cost the business.
Qualitative metrics can be used to influence maverick behavior. Salespeople need to comply with systems and participate in training. Performance against these types of behavioral metrics should be included in the measurement of a salesperson’s ‘worth’.
Team vs Individual Sales Performance
To achieve great results, most salespeople need to collaborate across and within teams.
In the 2013 Sales Compensation Trends Survey, 41 percent of the companies interviewed said they provide a team component for a primary sales job, and that the team component represents 30 percent of the available incentive.
Dancer and Wallace suggest including a team component in the sales commission plan is a good way to recognize sales teams across divisional lines of the business.
|Corp. / Div /
|Ins / Fin Services||68%||16%||21%||5%|
|FMCG / BWS||57%||9%||73%||13%|
Source: Paying for Sales Performance - New Research for Designing High Impact Sales Incentive Plans, Mark.Dancer & Marc Wallace, 2012.
Long-term vs Short-term Sales Performance
Setting monthly, quarterly and even annual targets are good; they give your salespeople something to aim for but inevitably short-term targets net short-term behavior and short-term results. Adding a long-term incentive as a component of your sales incentive program can be a way to even out the playing field, drive consistent behavior and account for short-term dips in performance.
The 2013 Sales Compensation Trends Survey revealed 30 percent of businesses surveyed provide long-term incentives as part of their plan yet interestingly only 10 percent of eligible salespeople received the reward.
So, now you’ve calculated the worth of your salespeople to your business, how do you work out how much to pay them?
A starting point for finding out how much salespeople are being paid are salary benchmarks. Large consulting firms, such as Hudson, publish annual salary surveys which benchmark's sales roles by:
These surveys provide an indicative range of what each sales role can earn but they do not show the breakdown between base and performance pay nor do they take into account variables such as:
- individual, team or company performance
- signing new business versus repeat business
- the variation in sales cycles between products/services
- the size of territories
- and much more
Global Best Practices
Another way businesses assess their remuneration strategy is to look at an industry or global trends. According to the 2016 Sales Compensation Trends Survey, companies surveyed are expecting a 9% increase in sales revenue this year and will offer their salespeople a 3.2% increase in base pay with an overall pay increase of 7%. Interestingly, fewer than 50% of the companies surveyed are planning to hire new salespeople to achieve the 9% growth.
The performance of a sales team is typically measured over a distribution curve. In their article Paying For Sales Performance: New Research for Designing High Impact Sales Incentive Plans, authors Mark Dancer and Marc Wallace suggest a distribution curve of 20/60/20 is indeed fairly typical. So it makes sense to pay your top achievers above the benchmark right?
According to Towers Watson Trends in Sales Force Incentive Practices, 40 percent of companies surveyed paid the top ten percent of performers more than twice the amount of incentive compensation than the average salesperson. But Dancer and Wallace argue “improving the results delivered by the “middle 60” to approach the level of top performers can deliver incremental sales gains of 15 to 20%! These results can be a career-making outcome for sale leaders, and should more often be a standard expectation.” So should you be paying the middle 60% more to improve sales performance?
So where does that leave the bottom 20 percent? As an organization, you have to ask ‘what went wrong?’ Were the targets set correctly? Were my low achievers given the same opportunities as my middle to top performers? Did they understand what was expected of them? These questions will provoke a thorough review of sales processes including how quotas are set, how accounts or territories are assigned and how the sales compensation plan was communicated. Once the external factors are reviewed, businesses can reasonably answer the question ‘what is my bottom 20 percent of salespeople worth?’ In some cases, they might be worth a second chance to prove themselves on a more level playing field. In other cases, they might be better looking for an alternative career path.
So, how much are your salespeople worth? Contribution to the bottom line has always and will always be an important measure of a salesperson’s worth but it doesn’t give you a complete picture. Consideration needs to be given to how they behave, what role all team members play in supporting the sale and the long term versus short term needs of your business. To offer a competitive remuneration package, businesses need to consider external factors such as their competitors, market, industry, global practices as well as internal factors such as the structure of their sales teams, their budget, short-term and long-term objectives. A thorough analysis of each of these variables should enable you to measure and set the worth of your salespeople.