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All GP Dollars Are Not Created Equal

August 16, 2010

In his recent MDM Webcast on sales incentives, Mike Emerson of Indian River Consulting Group emphasized that all gross profit dollars are not equal: "If we've got an order from a customer, and we have got the same order for five years, that's worth something to us. But if we have a new customer ordering a new product – that's expansion. We're expanding our market and our customer base. If you're paying a straight commission, you're not differentiating on that."

Co-presenter Mike Marks agreed, saying: "Where the pay plan gets really critical is when you define which dollars of GP are worth more than others, and that has to link back in some form or fashion to how they get paid."

But take care not to simply pay more on "more important" product lines than others, for example, when making a change in your compensation program, Emerson says. "If it just so happened that 60 percent of my territory is made up of those important products, and you're going to give me a bump in commission on those – I just got a raise. And I didn't do anything except be a participant in a different compensation program." As a result, using different rates for different types of products is probably going to have unintended consequences, he says.

Emerson gave an example of how gross profit could be used in a way that aligns with objectives but won't cause these waves in the sales force:

"In this example, we're looking at paying a commission rate that's historically been paid – up to a certain target. That target can be last year's total plus some growth," he says. "Once you get above your quota we're going to pay you a higher rate or a lower rate or the same rate. What rate you end up being paid in this illustration is going to be a function of hitting what we call secondary objectives.

"Those secondary objectives can be centered around a new product line or growing a customer base or building business in targeted accounts. Goals can be established, and if they're achieved, there is an opportunity for people to earn more. If they're missed, people will earn less. What's virtuous about this type of program is that you're not separating those goals and those payments. It's still a function of overall gross profit."

Of course, this was just one example, and as Emerson and Marks both said more than once during the program, there is "no perfect answer" when contemplating changes in compensation plans for your company. Sales compensation models are not one-size-fits-all. Marks and Emerson analyzed the pros and cons of different plans in part two of the recent three-part webcast series: Build an Effective Sales Organization for the Recovery. A DVD of all three parts is available in the MDM Store.

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