We are looking to change our sales incentive program. Does anyone have experience including a gross margin goal in your incentive plan? If so, any recommendations or lessons learned from making this change?
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A gross margin goal is not simple for it depends on the industry and such factors as a desired EBITDA, COGS movement, risk/reward, etc. For example a GM of 15%/20% (FMCG) may be acceptable whereas Fashion may want a 60% GM.
Your sales incentive program will depend on what it is designed to do and lag time from contact to sale to payment.
Your incentive program may have a sliding scale. For example: Achieve $X GM/MU = $x commission. Achieve $XX GM/MU = $xx commission
There are two aspects here. One is the gross margin and the other is mark up. To Finance it may be GM but can become confusing to a salesforce.
For example a GM of 33.33% is equivalent to a 50% MU. Which is easier to explain? May I suggest to sell/explain your incentive program to the salesforce you talk MU
How much influence does the salesforce have over negotiating pricing with the customer? If price is set then just dictate that's what it will be. However, if there is flexibility then a lower price can mean more effort for the salesforce.
Example: Rep A achieves s a MU pricing of 50%. Rep B achieves a MU pricing of 30%. So for Rep B to achieve the same dollar GM as Rep A they would have to sell 2 and a half times more.
Rep A
Cost 200
MU 1.5 = 300
GM/MU 100
Rep B
Cost 200
MU 1.3 = 260
GM/MU 40
100/40 = 2.5
Let's assume a 5% commision on GM for the salespeople. Rep A gets $5. Rep B gets $2.
The key lessons are to keep the design simple, make margin calculations transparent so reps trust the numbers, and roll it out gradually so they can adapt. Too much emphasis on margin can cause reps to avoid strategic but thinner deals, so balance is important.