A fundamental truth … good sales people always perform according to their comp plan. The best sales people know their incentive plan inside and out (btw, get rid of the ones who don’t understand their plans) and know how to maximize their earnings according to that plan. Larry Ellison, the CEO of Oracle Corporation, recently shared these thoughts regarding a Sun Microsystems’ sales team that understood their plan:
“More infuriating”, says Ellison, “is that Sun routinely sold equipment at a loss because it was more focused on boosting revenue than generating profits. The sales staff was compensated based on deal size, not profit. So the commission on a $1 million sale that generated $500,000 in profit was the same as one that cost the company $100,000″, he said. “The sales force could care less if they sold things that lost money because the commission was the same in either case,” he said.
http://abcnews.go.com/Business/wirestory?id=10630034&page=2
The Sun sales team was doing a good job at executing their plan. Drive revenue regardless of the discount and impact on profit. But Sun isn’t the only product vendor paying commissions on list or catalog price vs. net price. In fact, many leading companies that sell through distribution channels don’t know the net-price to the client and therefore they inadvertently encourage a similar behavior. They often try to address this issue by setting quotas at a list price level, but that only adjusts for the commission pay-out it doesn’t discourage the bad behavior of eroding your market price.
The best practice is to implement a sales plan to pay your sales team on net-price, the catalog price “net” of all direct incentives. The channels team should be compensated net of all incentives such as rebates, MDF, Co-Op funds, etc. Channel partner volume incentives are paid on the net price after special price discounts. The direct sales team is compensated on the true net-price to the end customer thus ensuring that they will seek to minimize discounts and maximize your companies’ profitability.
