Return on investment (ROI) pertains only to financial transactions such as acquisitions or product purchases, right? And, it’s really just a calculation that finance professionals use, right?
Wrong. Most C-level executives want to know the answer to two questions: What are we getting out of our sales compensation plan? How much does it cost us?
ROI has many definitions depending on the type of investment. The most common definition for sales compensation is productivity value divided by the resource costs that were committed.
This sounds like a simple concept, however, similar to ideas like “strategy” and “change management,” sales compensation ROI is a grey area and not a simple task. Productivity value is a measure of a specific value or set of values that are derived from the compensation plan. These measures include many things beyond just financial metrics. For example, productivity value could include areas such as customer satisfaction, employee satisfaction, and product success in the marketplace. Resource costs are a measure of the financial costs invested in the compensation plans. These costs primarily include what sales professionals are paid. However, other important measures include investments made in process (approval and crediting processes, for example), talent acquisition in sales and support personnel, and tools and technology.
Below are the first three key drivers to develop your ROI definition – The 7 Essential Sales Compensation Questions (I’ll write about the remaining four next week.)
Step 1: Why? Define the Strategy & Business Objectives
In simple terms, the strategy and business objectives are the company’s action plan to achieve its goals. The strategy is critical as it drives decisions on product focus, customers, and the go-to-market plan. Knowing and understanding this strategy will determine how your ROI definition is developed. For example, your company may be interested in growing revenue in a certain area of the business or focusing on a new product set. Metrics associated with the return on those facets of the business will drive how you develop what is important in your ROI definition. Your strategy may dictate that you need to invest more in an emerging market or technology that is new or different from your traditional business. In that case, you could calculate a separate ROI on those business lines or products in order to understand that specific return. Setting a company’s strategy is a collaborative exercise that evaluates goals broken out by customer, product, coverage, financial, and talent and is clearly communicated throughout the sales and sales support organization. It is from this point that you can start to develop critical elements for your sales compensation plan.
Step 2: How? Sales Compensation Plan Alignment to the Strategy
The movie Moneyball told the story of how Billy Beane, manager of the Oakland A’s, achieved one of the longest winning streaks in history with one of the smallest budgets in baseball. He did this by focusing on the numbers alone – no one else was doing this. He invested in people and processes that supported new metrics as a recruiting and training strategy (on-base percentage and minimizing outs). Billy Beane’s strategy was clearly defined and the metrics heavily influenced the desired outcome. This Moneyball concept can be leveraged when aligning your sales compensation plan to your company strategy. Placing specific, identifiable elements in the plan that drive towards the overall strategy is critical to meeting your company’s objectives. This seems simple, but we have found many instances of the sales compensation plans not aligning and often mis-aligning with the company’s strategy. For example, a company we have previously worked with had a strategy of driving long-term revenue growth. However, one of the largest and most lucrative components in its sales compensation plan was a one-time payment for the sale of products that encouraged the opposite – short-term revenue growth. This product represented a revenue line in the Profit & Loss statement that was not sustainable in long-term growth. This is a great example of a mis-alignment between the stated company strategy and the compensation plan. It is a well-known fact that the sales compensation plan will drive sales behavior. To ensure that the company is driving the right behavior, it is imperative that the sales compensation plan and ROI definition align with the strategy.
Step 3: Where? Define Productivity Value –“The Numerator”
At SalesGlobe, we go beyond the basic definitions of ROI. The concept of moving deeper requires innovative thinking from finance and compensation leaders beyond traditional means. Traditionally, when we ask finance leaders how they would measure sales force effectiveness and productivity (i.e. numerator of equation) it would be the top-line of all financial statements: revenue. Instead ask: what does revenue mean?
These different revenue components demonstrate innovative ways to redefine productivity value in terms of revenue. Company strategy will dictate which revenue component is most critical. There may be multiple ROI calculations if multiple revenue components are critical. For example, if new revenue is a focus, the ROI calculation would take new revenue divided by the resource cost specifically focused on new customer acquisition.
An example of a calculation is
In addition, penetration revenue may be important for an account manager role. A separate ROI calculation could be used for this plan that divides penetration revenue for these accounts by account manager resource costs.
An example of this calculation is
Regardless of the financial measure, companies should consider categories that align to their strategy. For example, it may be important to segregate by product type, accounts, geographies, or target markets. Whether it is specific type of revenue, operating income, profit/margins, volume of widgets sold, or net present value of customers, the productivity value should tie back to the strategy and be a major component of the sales compensation plan. It is recommended that the measures are quantifiable financial measures. However, there are other important considerations for productivity value outside of more traditional financial measures. While sometimes difficult to measure in relation to a sales compensation plan impact, these measures include brand awareness, customer satisfaction, net promoter scores (NPS), low turnover, or employee satisfaction. In fact, customer satisfaction measures can be broken down into categories related specifically to sales that will provide quantifiable value. For example, surveys can be administered to customers to determine their satisfaction with the sales professionals – their knowledge of the product, their confidence, their ability to understand the customer’s needs, etc. This feedback ties directly back the sales professionals’ motivation, happiness, and understanding of how they are paid. Another measure of a good compensation plan is essentially an NPS among sales professionals. Would your sales professionals recommend your company to other sales professionals in the market? This, too, can create brand awareness in the marketplace.
Next week I’ll continue to write about how to calculate the ROI of your sales compensation plan. Contact me at firstname.lastname@example.org with any questions.