If you have a sales-based business then it is of course absolutely crucial that you have a well structured sales comp plan to incentivize your staff. This is something which the brilliant Josh Melick has been describing recently and he believes that there should be an exact science behind this, which is why we love. Josh comes from a background of math and engineering which is why he speaks so much sense when he describes business in the same way.
His recent piece on how to calculate sales comp and the importance of it being a science and not an art is exactly what we are talking about. This is why Josh felt the need to write the article and why more businesses should be looking at this in a more scientific and economical way.
Risk of Overpaying
The risk here in reality is overpaying staff for new customer acquisitions, which actually hurt the business in the long run. This process will start by looking at the lifetime value of a customer, an average customer that is. Using the formula of length of time the average customer spends with the company multiplied by the average spend each month, will get you the future that you need to start from. If you miscalculate how much you have to pay your staff however, you may be paying over the odds based on the income of your average customer.
Wealth of Considerations
The value of the customer is not the only thing which you will have to bear in mind here, as there is loads of subtractions which you have to take fro that figure. For example you have to factor in overheads of the business such as rent and energy prices, the salary of the staff, marketing budgets and many other spends and costs which the company has. These should be added together and then divided by the average number of customers which you have. This is a very loose way of describing the calculation but that is because it will be different based on the kind of company which you are running, and how tight your margins are — not factoring in any debts which the company may have.
Underpaying The Staff
A failure to follow the science when it comes to the sales comp plan could be a risk to the business if they are overpaying, but underpaying too will present a clear risk. The last thing that the business wants is to find talent and train that talent, only for them to then leave to go to competitor. This is exactly why it is critical to find the balance between paying a competitive salary and comp package to the staff, and ensuring that the business is still going to do well afterwards.
Always follow the science of the business if you want to make sure that the decisions are made based on the numbers and not on predictions and feelings.
