At Compgun, our work centers on a simple belief: that performance-based pay is the single most powerful and dynamic operating lever that C-Suite executives have at their disposal. It is a tool that can both increase business performance and help a company maneuver through emerging market opportunities. Below, we’ll walk you through the logical underpinnings of that idea, and provide some compelling reasons to re-think the importance of incentive compensation in your business.
Business value is created through growth
Strikingly, in that analysis, although the per-dollar profitability of the business is an important factor in its valuation, by far the greater determinant of value is revenue growth. That is to say, if you take two otherwise identical businesses, the one growing at 10% year-over-year is exponentially more valuable than the one growing at 7.5% year-over-year, even if the latter company is a bit more profitable. When growth compounds each year, small differences in management’s ability to increase revenue translate to massive differences in business valuation.
If we can acknowledge that growth, first, and profitability, second, are the two most important inputs to the generation of business value, the next logical question becomes: how can we optimize both?
Enter sales incentives....
At its peak, LivingSocial had > 400 sales reps, in North America alone, responsible for creating ‘deals’ with merchants. During the same time, Groupon had hundreds more.
- The company’s ability to grow revenues was almost entirely contingent on the sales team’s ability to create promotions with local businesses. If Account Executives weren’t selling quality deals, LivingSocial’s millions of consumers would not buy them.
- In any given quarter, sales commission related payouts exceeded $1M and represented the company’s single largest non-payroll expense outside of marketing.
- It was empirically shown that even slight adjustments in the commission plan resulted in substantially different sales behavior and total plan cost.
What is true of LivingSocial is true of many other companies with large sales organizations: the sales incentive plan is one of the single biggest drivers of both revenue and operational cost. This is what makes a commission system so impactful and so strategic; it is one of the few business levers that can directly and simultaneously impact the metrics which are so central to business valuation.
What to do about it...
Businesses that are interested in finding the efficient frontier between revenue growth and profitability should model, evaluate, and test commission plans for return on investment. In our experience, the ideal incentive model design is not deterministic; perfect solutions are almost never found on the first try, or with a set formula. Rather, optimal solutions unfold over time as the result of of careful iteration and testing. Even then, they tend to be moving targets. As quoted in the April 2016 issue of the Harvard Business Review, it’s important for commission systems to evolve through testing:
There are important lessons to be learned from doing controlled experiments on sales reps’ pay, because the behaviors encouraged by changes in incentives can exert a large influence on a firm’s revenue, and because sales force compensation is a large cost that should be managed as efficiently as possible
Harvard Business Review
It is in this spirit that Compgun re-architected incentive management and modeling from the ground up. Compgun’s lightweight SaaS allows anyone to set-up and reconfigure any commission plan in under an hour. With Compgun, you’re never locked into one way of doing things; adjustments are as easy to make in our system as they are in an Excel model.
If you’re interested in using your commission plans to optimize revenue and profitability, request a demo at compgun.com. We can't wait to be part of your success!Request a Demo