“One of the basic philosophy decisions for compensation managers is whether sales compensation will be based on a cost of sales approach or a cost of labor approach,” says consultant Joseph DiMisa.
DiMisa, who is senior vice president, Sales Force Effectiveness, at Sibson Consulting, clarified the difference between the two approaches during a recent webinar sponsored by BLR® and HR Hero® (BLR is CER’s parent company).
“Cost of Sales” or “Cost of Labor” Philosophy?
| Approach |
Concept |
Example |
Market |
|
Cost of Sales |
Payouts are based on a percentage of volume or $ per unit. |
“I’ll give you 6% on everything you sell.” |
Market pay survey data are usually not used. |
|
Cost of Labor |
Compensation is based on what the market is paying, what you need to pay a representative in your industry. |
“Sales representatives in our industry make about $65K.” |
Compensation is tied to a quota/goal or to a standard industry performance benchmark. |
Sales compensation plan makeover: How to fix what’s broken. Webinar tomorrow—learn more!
The table below further clarifies the different circumstances in which employers might choose cost of sales of cost of labor.
Business Stage
|
|
Cost of Sales |
Cost of Labor |
|
Typical Use |
More for acquisition of new—higher cost of sales |
Greater percentage of effort on maintaining book of business |
|
Business Stage |
Start-up businesses |
Mature businesses; complex sales organizations |
|
Sales Complexity |
Lots of transactions |
Consultative/ |
|
Control over Sale |
Customer buys from the representative. |
Customer buys from the company. |
|
Pay Prominence |
Pay is the primary performance measure. |
Pay is only measure of success. |
|
Company Support |
Seller is a “lone ranger.” |
Sale requires significant support from the company. |
Other considerations:
- Definition of the competitive labor market
- Target pay (many don’t hit target) vs. market pay (what market is paying—an actual number)
- Need for internal equity (comparators within company)
- Desired dispersion between top, average, and low performers
- The degree of uniformity across sales incentive compensation plans (no uniformity, large variance)
- Caps and upside earnings potential (are people earning these?)
- Sales compensation plan governance and administration
Sales Compensation Plan Makeover: How to Fix What’s Broken & Rejuvenate Your Sales Force
Live webinar coming today, May 29, 2014
10:30 a.m. to Noon Pacific
Is your sales compensation plan driving the performance you expect and need? Or is it on life support? When sales sag, but you just can’t seem to put your finger on what’s wrong, it may be time to take a focused look at your current sales compensation structure and evaluate whether it’s really aligned with your organization’s mission and sales force expectations.
Join expert speaker Joseph DiMisa for this webinar, which will help you spot the signs that a sales compensation plan makeover is in order and give strategies for keeping what’s working so you can reestablish sound compensation practices that benefit your organization.
Participate in this interactive webinar, and you’ll learn:
- What to consider before reworking your pay formula, including the type of selling your workforce does, your business sales cycle, and more
- How to evaluate what’s most important to your organization, such as margins, profits, and market share, and develop a sales compensation plan that aligns with your core mission
- Tips for determining whether your established short- and long-term sales goals are working effectively in relation to your overall business needs
- The types of incentives you may want to consider based on your organization’s sales cycle and overall sales goals
- How to tell if your current sales compensation plan is due for a makeover based on industry pay rates
- How use compensation surveys
- Signs that you may want to switch from a fixed or variable sales pay model—and vice versa
- And much more!
In just 90 minutes, you’ll learn how to give your sales compensation plan a fresh face that rejuvenates your sales force.
Download your copy of Paying Overtime on Bonuses: A Calculation Guide today!