Saturday, January 10, 2009

Pay Sales Staff for Gross Profit, Not Sales

Top-line sales are much less important than gross profit - so pay your sales staff accordingly. Most businesses struggle with how to structure the compensation for sales reps. We don't want it to be so complicated that no one can understand it. But we also need it to incent the behaviors that will most help the business achieve its objectives.

If a sales rep is paid just to bring business in the door with no other qualifying criteria in place, the sales rep will eventually bring in a lot of unprofitable business. In fact, I watched an entire company drop into insolvency and then permanently close its doors because one sales rep was paid very well to bring in very unprofitable business.

We are in business to generate sales, from which we subtract our direct costs (also referred to as cost of goods sold and cost of sales). The amount left over is called gross profit. Our gross profit needs to exceed our fixed and overhead costs, or we will be in trouble in a hurry. So, we need sales reps who create gross profit for the company, not sales. Start changing the focus of the sales reps now. The competing theme to this is the desire to bring in more sales.

A good sales manager and CEO will define the parameters within which sales reps may work to get business, and they will give the largest rewards to sales reps who help the company achieve its desired gross margin.