The old cliché is “you can’t make it up in volume,” but most companies continue to motivate their sales team to push sales volume without accounting for the financial risks they take to get there: discounts and allowances, rebates, fees, service costs, etc. The result is a vicious cycle of deteriorating value, where tighter and tighter margins force more and more spending to drive volume. Here’s a two-part bonus plan that will break the cycle:
- The first part is about volume, as usual. Except that volume growth is not the bonus objective, it is a qualifier, a threshold number to get into the bonus plan (the growth objective tends to keep managerial decision-making balanced). This number must be attainable.
- The bonus itself is a percentage of the year-over-year change in customer level P&L performance (which nets all revenue and cost streams for all customers within one manager’s scope of responsibility). If customer level P&L is not available to you, then marginal contribution (after allocated customer support costs) can be an effective metric.
Pay for value bonus program requirements:
- The sales manager is seen as a “virtual CEO,” with full control of all of the levers within his or her scope of responsibility and continuous visibility of effectiveness of levers on created customer value.
- Measurement is fact based and very specific, to the customer, product, service and event
- Using information does not steal time from ordinary managerial duties.
- Bonus status information is always current and available ad hoc, on demand.
Does this seem impossible to you? It’s not, and I can prove it.
In my mind there are 4 basic information principles for making a business process more efficient:
- It is specifically about the entities involved in the decision situation
- It measures precisely the history of net value added by transactions, accrued by entities (persons; products; customers; assets; etc.) and constrained by capacity (volume per labor hour; profit per average customer; margin per square foot; cost per repair; etc., etc.
- It is in front of the decision maker closest to the transaction
- It is available before the next transaction
The result is greater certainty and control of process levers. Do you agree? Am I missing something? I will most definitely take the time to read your comments and respond. I promise to be brief if you do.