Unpacking and Managing the Real Cost of Sales Compensation

Sales compensation is one of those critical elements of a business strategy that, on one hand, impacts the motivation of your salesperson and on the other, your company’s bottom line. But the real cost of sales compensation is far beyond the basic costs of salaries and commissions. To optimize your sales strategy and be able to forecast profitability, it is essential to understand and manage all the associated costs. This article will be exploring the main metrics and considerations for the real cost of sales compensation and giving strategies to optimize your compensation plan.

The Hidden Costs of Sales Compensation

While the cash portion of sales compensation—base salaries plus commissions—has become a significant component of total sales costs, it is only a part of the story. In the practice, those industry benchmarks suggest that the cost of cash covers about 40% of the total sales costs and, at the same time, corresponds to 7.9% of sales revenue. In this connection, the remaining 60% are a variety of indirect costs that may actually become quite influential in your total sales compensation expenses.

Knowledge about those hidden costs is indeed pivotal when evaluating the whole sales compensation strategy. These may include:

• Recruiting and Onboarding: The costs associated with recruiting, hiring, and onboarding new sales reps. Such expenses can be quite high, given the ramp-up time required for new hires to reach full productivity.
• Management and Support: Costs related to sales managers, support staff, and sales enablement resources for driving and supporting your sales team.
• Technology and Tools: Expenses incurred related to CRM systems, sales automation tools, and other such technologies used by your sales team. These are tools that are needed to help manage customer relationships and enable the tracking of performance.
• Training and Development: Continuous training programs for sales representatives and professional development opportunities incur costs such as continuous training to enable the team to be up to date on the most current sales technique and other trends in the market.

When these indirect costs are included in the value, you would have a clear perspective on the real cost of the sales compensation plan and elements that may be put under checks for optimization.

Key Metrics to Determine True Cost

To efficiently oversee and optimize your selling cost, you must track and analyze key metrics that will give an insight into the effect of both direct and indirect expenses. Here are some of the basic metrics:

1. Base Salary and Commissions

First calculate the total cost for a base salary together with commissions and bonuses. These are the direct sales force expenditures, including payments made to the sales representatives, associated payroll tax, and employer-paid benefits. Direct costs are the most easily traceable but should also be related to overall sales performance to ensure that they are delivering the correct ROI.

2. Benefits and Taxes

Health insurance, retirement contributions, and other benefits are employer paid; therefore, these benefits must be included when assessing the full cost of sales compensation. Additionally, payroll taxes including Social Security and Medicare will need to be factored into total costs. The exact amount of all such costs will vary by geographic region, employee category, and level of compensation; it will thus be important to consult financial advisors or tax experts for precise computations.

3. Costs Incurred in Recruiting and Onboarding Sales People

Costs involved in recruiting and onboarding new salespeople are significantly high and prone to an increase when one factors in the amount of time new hires take before becoming fully productive. Recruitment costs include job advertising, recruiter fees, and the time by human resources and hiring managers. There is also the cost of programs for onboarding, mentorship, and productivity lost by a new hire during this time.

4. Length of the Sales Cycle and Team Performance

One of the greatest influences over the true cost of sales comp is the length of the sales cycle and your team’s success. Long cycles extend the time period for fully realizing a return on one’s investment in fixed costs that must be incurred, i.e., salary before any commissions are earned. They also increase the portion of fixed costs on your books if sales don’t meet expected levels, which in turn has a further negative effect on overall profitability.

Sales Compensation Cost Optimization Strategies

The sales compensation plan should subsequently be optimized for alignment to business goals and efficiency. Such optimization would include:

1. Compensation Alignment with Business Objectives

The entire set of business objectives, both general and detailed, must be achieved with the compensation plan that’s adopted. If, for example, the goal is increased customer retention, consider providing awards for multi-year renewals or up-selling to existing customers: perhaps through bonuses, or SPIFs—Sales Performance Incentive Funds. Tying compensation to key business metrics aligns the things that you reward with the most critical behaviors for long-term success.

2. Leverage Compensation Modeling Tools

Visualize any sort of compensation plan you can think of, estimate costs, and optimize—all without the need for complicated spreadsheets. Use Modeling Tools: Cost-effective and impactful compensation plans.

3. Manually Calculate Compensation

With a complex process, compensation is time-consuming and involves many errors when done manually. Automate these calculations with integrated software solutions not only to make them accurate but also bring down the administrative overhead and take real-time insights into the cost of compensation. Automation also helps to make the compensation more transparent to the sales team so they can track their earnings and progress effectively.

4. Regularly Review and Adjust Your Plan

The sales compensation plan you implement should not be a static document; rather, it should evolve along with your business. Continuously review how your plan is performing, collect feedback from the sales team, and make necessary data-driven adjustments in order to fine-tune it towards delivering business goals.

Conclusion

Ensure that you can confidently account for and measure against the real cost of sales compensation so you can help your business maximize potential and achieve long-term profitability. Coupling critical metrics tracking with a compensation infusion strategy will result in driving performance to the tilt while at the same time taking control of spiraling costs.