Business owners reluctantly pay out large commissions to overperforming sales executives. Yet it’s the underperforming salespeople who deliver the most expensive revenue. Businesses that want to reduce the cost of new revenue should take a look at their commission plans.
Overperforming sales executives can take home big commission pay-outs. When those payments come out of your budget this can sting a little. The absolute commission amount doesn’t tell the whole story however. A more useful way of analysing the cost of a sales executive is to look at their total earned amount (base salary + commissions) as a percentage of acquired revenues.
The total earned amount of high performing sales executives is mostly made up of commission payments. The base salary is only a small fixed component of their earnings. This reduces the relative cost of the revenue that they sold. Conversely, the total earned amount of low performing sales executives is made up mostly of base salary. In this case the base salary is a large fixed cost that increases the cost of acquired revenues.
To illustrate the impact of low performance on the cost of new revenues, consider the following commission plan:
• Base salary of EUR 100,000
• Bonus of EUR 100,000
• Target of EUR 600,000
• Bonus pay-out proportionate to target attainment.
• Multiplier of 1.5x for revenues above the target, uncapped.
This plan results in a total earnings curve as shown below. At 100% target attainment the relative cost of the sales executive is 33%. At 150% target attainment this drops to 31% as the fixed cost of the base salary are a smaller part of total cost. So, overperforming sales executives deliver cheaper revenues despite multipliers in their commission plans. At the same time, at 70% target attainment the relative cost are 40%. The revenues delivered by underperforming sales executives are much more costly!
To protect against the relatively high cost of underperforming sales executives it is advisable to withhold commission payments until a threshold attainment is reached. If you’d like to learn more about the cost of your current commission plan, please contact us with your questions.