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®.
“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. |
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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 Relatively simple |
Consultative/ Relatively complex |
|
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 Relationship is with company, not rep |
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
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