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Sales commission analysis

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Viewing 19 posts - 1 through 19 (of 19 total)
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  • #49526

    Sheila
    Member

    Hi,
    Appreciate any info you can provide with regards to conducting a feasibility study on the impact to potential loss in revenue if we cut down cost of sales commission.
    Thanks!
    Sheila
    [email protected]

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    #169352

    Deanb
    Participant

    Sheila,Be very careful. I have seen this kind of move result in dramatic upheavals in the sales force personnel and behavior, followed by countless SS projects to try to improve retention and behavior caused by the policy change. Trained and effective salespeople are often more difficult and expensive to replace than estimated. I had one client tell me every open and unfilled territory cost the company 300k in lost gross margin, many times more than any expected commission savings. This doesn’t even consider the lost market position potential, which often takes years to establish.Another risk: the bad-will can spread to other departments. Salespeople are often closely intertwined with the organization’s operating processes. Anytime an entire function is abused the ripple effect can be significant.IMHO, I would look extra hard to cut costs some other way.

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    #169373

    BTDT
    Participant

    Sheila:You are attempting to cut costs on the backs of your one source of revenue. I have seen a large company with superior technology nearly bankrupted trying to do this. It put the company in such a poor position that it was bought out by its competitor.This will be the hardest change management situation I can think of. It will cause enormous problems with the rest of the organization and will have long reaching effects. I have to agree with DeanB on this one.Cheers, Alastair

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    #169383

    ANDREA
    Participant

    The key phrase here being “trained and effective” sales people.  If the purpose of this exercise is to weed out the in-effective, you could attach the commissions to specific targets being met consistantly and roll back those that do not perform.
    Just a thought…

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    #169385

    Swaggerty
    Participant

    Hi Andrea,
    How about looking at this problem from a different perspective, i.e, how can we raise revenue, and improve profitability rather than cut costs? Incentives push people to perform better..I’ve come across a BPO firm, which has reduced payouts to its employees owing to the increased dollar value…it has been stuck by a spate of attrition. Typically, this cost is not captured by the system.
    Regards,
    George

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    #169420

    Silviu
    Member

    Sheila,
    What business are in? You sell cars, medication or are you a telco company?
    We have a portfolio of about one hundred of products, with new one coming almost every month with strong ATL campaign and change in direct bonus for product. When there is direct bonus, agents sell, if there is not, they don’t sell. So we play with direct remuneration scheme based on priority, market response and other factors.
    Silviu

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    #169484

    Sheila Yacap
    Member

    I agree. This is also the reason why we want to conduct a study on the impact to potential loss of revenue to control the flow of this communication and do our best to buffer the impact to our employees.
     
    Appreciate the insight.
     
    Thanks!

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    #169717

    Sheila Yacap
    Member

    It will be tough to say what impact in revenue the decrease in sales commision will have if this is the first time a change in structure will happen.
    Could somebody share a study they made about the %lift we saw when we raised the incentive rates?
    Appreciate any help you can provide.
    Thanks,
    Sheila
    [email protected]

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    #169945

    Hogg
    Participant

    Shiela,Suggest you ask “Why” 5 times – why do you want to cut sales commission costs. The 5-why’s will take you to a better root cause to address.You might find that shifting the compensation model to base commissions on net revenue or margin will focus your sales force on the products which contribute to your financial health and not the “easy to sell” old products that have small volume and high set-up costs.

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    #169947

    Deanb
    Participant

    I like the 5-Why approach you suggest. Adding to that, I would suggest that if the reasons for cutting commissions potentially harm any stakeholders, including salespeople, then the reasons are a little pregnant and need to be rethought.The Pareto Efficiency principle states: “At least one party must be clearly better off, while most are as well off and none are worse off.” In shorthand, this is what “win-win” is supposed to mean.

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    #169969

    Leanne
    Participant

    You could model it out with cost accounting by estimating retension of a percentage of your sales force and orders and create a mock P&L to compare the proposed structure against the historical data.  Keep the per sale revenue numbers the same, model out at the reduced volume and plug in the incentive expense you are proposing.  If the net income after the cost savings is greatly reduced, you should go back to holding folks accountable to specific targets and eliminate the non-performers.  As you replace your sales force through attrition, you can hire under different comp plans until you are stable enough to do globally. 

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    #169976

    Deanb
    Participant

    I spent 20 years as a Sales Manager. I loved it when my competition did what you are suggesting. It was like taking candy from a baby.Your marginal analysis grossly underestimates the numerous loss functions you are flirting with. To really analyze this properly, you have to think more with marketing economics and COPQ than with cost accounting.Like trying to cut driving cost per mile by not putting gas in the tank. Sure, this would cut a cost, but it would also cut productivity that the running car could have produced, cause idleness and waste. It would also change market behavior, causing those dependent on the car to find alternatives, and to develop relationships with those alternatives. Removing gas from the tank, and then holding the car responsible for not hitting its driving targets is a recipe for self destruction and promoting the competition.

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    #169977

    Deanb
    Participant

    I used to tell my salespeople “they do not have to be perfect-just good and consistent players- while we wait for our competitors do some damn stupid thing.” “Then we will be ready to step up in a big way, fill the void and retain it.”Of all the sales growth strategies I have seen come and go, this one has stood the test of time as the true breakthrough strategy. The key was to make doubly sure we were not the ones doing the damn stupid thing.

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    #169978

    hosny
    Member

    What nonsense!How do you know everyone has equal inputs! Inputs aren’t static you know – not all sales regions are homogeneous.No wonder Six Sigma is falling into disrepute!

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    #169979

    Leanne
    Participant

    So then, what are you suggesting for assisting Sheila?  It appears to me that due to the current incentive plan, many are too comfortable and the company feels they may not be getting the return on investment they had hoped to realize.  I understand the risk of breakage but sitting pat does not sound like the best solution either.  There needs to be some way to measure the performance and incent folks not only on efforts but on results.  Without modeling out different scenarios, she will better be able to predict the future.
     

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    #169981

    Deanb
    Participant

    Sheila,I understand your task to “conduct a feasibility study on the impact to potential loss in revenue if we cut down cost of sales commission”….and your appreciation for the need to “control the flow of this communication and to buffer the impact to our employees.”What we do not know is the nature of the problem (sales costs) you are studying to cut. Is your company out of step with competition on costs? Or does some bean counter just not like to see salespeople prosper? We cannot impute from your posts if salespeople are lazy, unproductive, or too costly relative to the industry.If you have a strategic reason to do this study, then it may be justifiable to involve key sales management personnel to study this. They are the closest to the situation and can candidly advise of the risks and expected outcomes.If you do not see a strategic reason for cost cutting, then I suggest you limit your study to passive methods including industry benchmarking, and not stir up the bee-hive unnecessarily.Good luck.Dean

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    #169987

    Deanb
    Participant

    Leanne,From the limited information Sheila has provided it would be impossible to impute any positive or negative attributes towards the sales force. The only thing we can deduce is someone desires to cut costs there and has asked Sheila to study the sales force commissions.Knowing this study, if revealed to the affected parties, will be potentially damaging to morale, behavior and possibly performance, merely entertaining the issue carries risks. Like telling your significant other “you may not love them anymore-you are studying it.” Merely raising the subject could do most of the damage, even before you decide or cut a single commission.The basic question is “How much risk should be taken to study this? IMHO that depends of the nature of the cost problem at hand. Is this just a convenient place for someone to cut costs (not in their back yard), or is there evidence that sales costs are comparatively high relative to competition causing a strategic cost issue to be resolved? It might be foolish to risk alienation of the sales force just to study an unnecessary or non-strategic cost scenario.

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    #169988

    hosny
    Member

    Leanne,I’m suggesting she minimize the risk of getting rid of some of her best performers!You stated: “you should go back to holding folks accountable to specific targets and eliminate the non-performers.”In my experience, many companies use their best sales people to try develop new customers, once mature, they transfer the business to immature sales staff, who earn less commission.The best sales staff then leave the organization, rekindle their ‘old’ contacts, and take away the business.The first think for Sheila to ascertain is whether or not the business is really out there.Secondly, try to find out why some sales people have lower ‘apparent’ performance.If the lower ‘apparent’ performance is due to an immature customer base, or disloyal customers – find the true cause.Yes, some people get comfortable and rest on their laurels, but to make such an assumption without adequate scrutiny of the facts reeks of the same disease.Respectfully,Sony

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    #169990

    Brandon
    Participant

    Just a thought – you may want to examine what it is you’re selling. May not be the sales force at all.
    Mught be the market. Might be your competitive position.
    Lot of dynamics involved in sales performance.

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