How can you measure the ROI of a sales compensation plan to ensure it's worth the investment?

1 The ROI formula

The ROI formula is a common way to compare the benefits and costs of any investment, including a sales compensation plan. The formula is:

ROI = (Benefits - Costs) / Costs x 100%

The benefits are the increased revenue or profit that you attribute to the sales compensation plan, and the costs are the total expenses of designing, implementing, and administering the plan. To calculate the ROI, you need to subtract the costs from the benefits, divide by the costs, and multiply by 100% to get a percentage.

2 The benefits of a sales compensation plan

The benefits of a sales compensation plan are the positive outcomes that you expect, such as higher sales volume and revenue, improved performance and productivity, better alignment with strategic goals, increased customer satisfaction and retention, and enhanced sales culture and engagement. To measure these benefits, you need to define key performance indicators (KPIs) that reflect your sales objectives and track them over time. Examples of metrics include revenue per salesperson, sales quota attainment, sales cycle length, customer lifetime value, and sales turnover rate.

3 The costs of a sales compensation plan

The costs of a sales compensation plan are the negative impacts that you incur from your plan, such as higher payroll and taxes, more complex administration and reporting, higher risk of errors and disputes, more compliance and legal issues, and lower profitability and margins. To measure the costs, you need to account for all the direct and indirect expenses of your plan, such as base salary and commissions, bonuses and incentives, benefits and perks, plan design and consulting fees, software and tools, training and communication, as well as audit and review.

4 The ROI analysis

The ROI analysis is a process of comparing the benefits and costs of your sales compensation plan to evaluate its effectiveness and efficiency. To do so, you should collect and analyze data on the benefits and costs of your plan for a specific period. Then, calculate the ROI using the formula and compare it to your target or benchmark. Additionally, identify the factors that influence the ROI, such as the plan design, the sales strategy, the market conditions, and the sales behavior. Finally, adjust the plan or the strategy as needed to improve the ROI or address any issues or challenges.

5 The ROI best practices

The ROI best practices are tips and guidelines that can help you measure and optimize the ROI of your sales compensation plan more effectively and accurately. To do so, you should align the plan with your sales goals and strategy, communicate them clearly to your sales team, and use a mix of fixed and variable pay to balance the risk and reward. Additionally, it is important to keep the plan simple, transparent, and automated, as well as review and update it regularly while soliciting feedback from your sales team and stakeholders. Ultimately, by using the ROI formula, key metrics, ROI analysis, and best practices, you can evaluate the impact of your plan on sales performance and profitability to make informed decisions to optimize it.