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Compensating Sales People on Net or Similar Proxies

By Steven Miyao

Compensation is a powerful tool for firms to align their sales goals with a company's profitability objectives. When structured optimally, it motivates wholesalers to spend time with the most valuable advisors, rewards wholesalers for balancing sales across products, and compensates wholesalers to sell specific products. Yet, most firms continue to implement sales plans that fail to drive profitable behavior, activities and ultimately, results.

Firms should use net sales or a similar proxy to tie the firm's goals with those of the salesperson by factoring redemptions into variable pay. Using net sales in addition to gross sales and other measures of success helps to manage sales costs and acknowledges that saving a dollar of redemptions is cheaper than identifying new sales opportunities. Though net sales can be difficult to accurately measure, firms should still consider tying some measure of net redemptions into sales compensation. The practice serves to underpin the fact that wholesalers have a role in redemption rates and aligns compensation with corporate profitability.

In studying 2011 wholesaler compensation plans, only 25.0% of firms use net sales as part of commissions to calculate external wholesaler variable pay. 33% of firms completely ignore redemptions and 19% of firms consider net sales as a determinant in bonus calculations. Firms would be wise to make sure that they are not completely ignoring redemptions through the use of net sales, or indirectly through applying offsets. One firm has a large trade policy where sales over $5 million are paid commissions over six months (instead of up front), so that short-term redemptions can be excluded from wholesaler commissions. Another firm that uses gross sales has started to take redemptions into account by factoring redemption metric into bonuses with the hopes of further increasing the importance of redemptions on compensation in the future.

Compensation can be a great way to influence redemptions, either through using net sales or through emulating net sales. What tactics have you used to influence net sales?