Sales Representative, Example 5B: Link Variable Commission Hurdle in Software

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Sales Representative, Example 5B: Link Variable Commission Hurdle
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Figure 5-27 is an example of a variable commission rate featuring a hurdleWhile the payout schedule is not capped, the upside commission rates are not available unless the hurdle is met
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Component Link Variable Commission Hurdle Hurdle: All products must be at 75% of quota, before the second commission rate can be earned on any product Product Categories Digital Component Service Assemblies Contracts Products 4% 2% 10% 6% 3% 15%
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1 Commission Rate nd 2 Commission Rate
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Figure 5-27 Variable Commission Rate with Hurdle
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Observations Hurdles are easy to understand One limitation is that they are like an on/off switch Either the sales representative reaches the hurdle or he or she does not
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Sales Representative TI-Commission: 5B Link Commission Multiplier
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Like other linked techniques, a multiplier requires two or more measures (see Figure 5-28) A multiplier provides greater pay discrimination than a hurdle The payout impact of the multiplier varies
Positive Impact of Multiplier High
Compensation
Negative Impact of Multiplier
Low Sales Production
High
Figure 5-28 Sales Rep: 5B Link Commission Multiplier
TLFeBOOK
Five
given the performance range of the individual A multiplier provides very clear direction on the importance of the first and second measure
Observations As Figure 5-29 illustrates, the payout impact is both positive (did exceed goal on the second measure) and negative (did not exceed goal on the second measure) Some organizations prefer to have only a positive multiplier with no take-away of a negative deduction
Component Measure 1: Commission Rate
Link Commission Multiplier Performance To Goal To 100% Above 100% Commission Rate 7% 12%
1 Commission Rate nd 2 Commission Rate
Measure 2: Commission Multiplier
Performance to Goal nd on 2 Measure Above 120% 110% to 119% 105% to 109% 100% to 104% 95% to 99% 90% to 94% 80% to 89% Below 80%
Multiplier of Measure 1 Commission Earnings 130% 120% 110% 100% 95% 80% 75% 50%
Figure 5-29 Link Commission Multiplier
Sales Representative TI-Commission: 5C Link Commission Matrix
The final link design is a matrix (see Figure 5-30) Matrices are used when the company asks the salesperson to resolve two competing objectives For example: (1) grow revenue but (2) sell profitably; or (1) retain existing customers but (2) add new customers; or (1) sell the core business but (2) sell new products, too Anytime you wish the salesperson to reconcile competing objectives, a matrix is an excellent formula mechanic
TLFeBOOK
Formula Types
Percentage of Sales Revenue Dollars/Month
Excellence 20 18 16 13 11 08 06 03 00 Threshold 30 28 25 23 21 17 13 08 04 39 37 35 33 21 25 19 14 08 49 47 45 43 40 33 2,6 19 13 59 57 54 52 50 42 33 25 17 Target 67 63 60 57 63 45 37 28 20 74 70 66 61 57 48 40 32 23 82 77 71 66 60 52 43 35 27 90 83 77 7-0 63 55 47 38 30
Sales Volume to Goal
Target
Threshold
Excellence
Average Gross Margin to Goal
Figure 5-30 Sales Rep: 5C Link Commission Matrix
With a matrix, the salesperson who in this case has pricing latitude needs to sell over target and with a high average gross margin to be eligible for commission rates greater than 5 percent Exceptional performance on both measures (volume and average gross margin) can provide a commission rate as high as 9 percent for all sales revenue Note the following features of a matrix:
The salesperson must resolve two conflicting measures in this case, sales volume versus profits There is a double threshold at the low end Average gross margin has a higher importance weighting in the matrix than sales volume goal attainment Average gross margin is weighted 60 percent, and sales volume goal attainment is weighted 40 percent in the matrix Target quota can be the same for all salespeople, assuming territories are of equal size and opportunity, or can vary by salesperson Matrices are normally constructed with an odd number of rows and columns to provide a middle cell for presenting target performance and incentive rate Most matrices are at least 9 9 and some are as large as 15 15
TLFeBOOK
Five
Observations Matrices are ideally suited to provide rewards when there are two competing measures Because of matrices visual displays, salespeople readily understand how their performance impacts their pay
Hurting profits by rewarding profits Senior management was perplexed to learn that the gross profit measure in the incentive plan actually hurt profits Distribution companies sell what others manufacture Multiline wholesalers purchase products from numerous manufacturers, bring them into inventory, and sell to the local market The key measure of sales success is gross margin dollars sales price less loaded cost of goods Management correctly provided sales personnel with pricing flexibility to meet competitive pressures To reward high sales with high pricing, management structured the incentive plan to pay a flat commission rate on all gross margin dollars Unfortunately, it had the unintended consequence of reducing pricing Why Rather than keep prices high and risk losing the sale, sales personnel would reduce pricing to save the order A commission on a few gross margin dollars is better than a commission on no gross margin dollars Preferred Solution: Create a payout schedule that pays a higher commission rate on gross margin dollars for orders with higher gross margin percent
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