Do you measure the true profitability of your individual contributors rather than just their sales?
Many companies look at how much sales a person is generating instead of how much money he is making for the company.
For example, say sales rep A is your top producer who brings in $2.0 million in gross sales while your average rep is at $1.5 million. But let’s say that the margin of sales rep A is 12% and your average person is at 16%. Thus, sales rep A’s margin is $240K, which is the same as our average rep. On top of this the total compensation cost, which includes base salary, commission, payroll taxes and workers’ comp is $160K for rep A due to his longevity and high base salary while the average rep is at $140K. Thus the contribution (margin less total compensation cost) of sales rep A brings in $80K while the average sales rep is $100K.
The next step might be to determine how much overhead each sales rep has to absorb to make a profit. Lets say that our overhead (all expenses other then the cost of our sales reps is $600K and we have 10 sales reps. That means that each person has to bring in $60K for us to just breakeven. Sales rep A’s full absorption profit is $20K, while the average rep is at $40K or twice that of our “top” producer when we look at their relative profitability. Another way of looking at this is that we have a 1% profit on sales for rep A vs. 2.7% for our average rep.
When setting up compensation plans it might be a good idea to look at the proverbial bottom line of what a person generates not just the gross sales that they bring in. In this example we paid a lot more to retain a “high producer” then may be warranted. Think of this as the equivalent of the famous movie Money Ball, where the Oakland Athletics baseball team focused on assembling a team of players based on unbiased performance analytics and metrics and won several pennants. Instead of signing overvalued players, they instead looked at the bottom line of what their players were producing. This approach then became the standard that many other teams emulated. One should consider doing the same in running their business.
We welcome your questions as to the challenges you face in order to grow.
To see all articles in this series please go to http://optimal-mgt.com/blog.