Sales Incentive Calculation: Stop making these mistakes while making Sales Incentive Calculations
December 12, 2022
Sales incentives are great for motivating sales people, but the most effective way to calculate them is through a process called "incentive compensation." Incentive compensation is when a company or business rewards employees for achieving specific goals or working hard.
Sales incentives are different than most other forms of incentive compensation because they're generally based on outcomes or revenue earned by an employee instead of some other input-driven metric like time spent working or the number of hours worked per week.
Types of Sales Incentives
There are three broad sales incentive programs: Performance-based, Cash-based, and Commission-based.
1. Performance-based sales incentive programs pay employees based on their performance (for example: if a sales person hits their quota).
2. Cash-based sales incentive programs pay employees based on the amount of money they bring in (for example: if an employee brings in $50,000).
3. Commission-based sales incentive programs pay employees based on how much commission they bring in.
Why Does Sales Incentive Matter?
Sales incentives matter because they motivate sales teams to perform at their best, aligning individual goals with company objectives. This motivation boosts productivity, increasing sales and revenue. Effective incentive programs also enhance employee retention, reducing turnover costs.
Furthermore, incentives foster healthy competition, inspiring salespeople to surpass their targets, benefitting the organization. Customer-centric incentives can enhance satisfaction, loyalty, and brand reputation. Incentive programs are adaptable and can evolve to suit changing business needs, ensuring continued relevance and effectiveness. Ultimately, sales incentives drive revenue growth, making them a vital tool for business success.
How to Calculate Sales Incentives
Here is a simple way to effectively calculate sales incentives for your employees:
1. Calculate the Cost of Goods Sold
To calculate sales incentives, start by calculating the cost of goods sold (COGS) for your business. Then, you'll need to subtract any expenses related to selling the product or service—such as advertising and shipping—from the COGS figure to get what's left over after paying your costs.
2. Divide by the Revenue
Next, divide this figure by revenue from your product or service. This will tell you how much each additional sale would bring in if it were sold at full price. Finally, multiply this number by 100 and add it together: that's your sales incentive calculation!
Now that you know how much each additional sale would bring in, let's look at some common mistakes people make when calculating their sales incentive calculations.
Common Mistakes to Avoid While Calculating Sales Incentives
You need to calculate the correct amount for each representative when making sales incentives.
If you're confused about how to calculate your sales incentives, here are some common mistakes to avoid:
1. Not factoring in employee discounts or incentive bonuses.
2. Not taking into account tax implications when calculating your sales incentives.
3. Not considering whether the product is taxable or non-taxable when calculating your sales incentives.
4. Misunderstanding what type of commission an employee receives from their employer and how that impacts their earnings potential when calculating their sales incentives (remember, commissions come in two forms: cash and stock).
5. Not having reliable sales commission software to back up, recheck and verify all the payouts and keep all the employee records and performances in check to make efficient decisions.
The Pros and Cons of Sales Incentive
Motivation: Incentives motivate salespeople, boosting morale and goal achievement.
Goal Alignment: Incentives align sales efforts with company objectives.
Performance Improvement: Encourages skill development and better sales performance.
Flexibility: Can be customized to suit company needs.
Retention: Attractive incentives can improve employee retention.
Costs: Implementing incentives can be expensive.
Short-Term Focus: May lead to short-term sales focus overlong-term goals.
Unintended Consequences: Poorly designed programs can encourage unethical behavior.
Employee Discontent: Unfair or overly competitive programs can create dissatisfaction.
Complexity: Administering incentives can be complex and resource-intensive.
Risk of Burnout: Pressure to meet targets can lead to burnout among salespeople.
Make sure you create a proper plan, know the cost of incentives, know the real reason to give incentives, and understand what success means. Considering these points, you can create a strategy that will yield better results than just winging it.
1. What is incentive compensation, and how is it different from other forms of compensation?
Incentive compensation is a system where employees are rewarded for achieving specific goals or working hard. It differs from other forms of compensation like time based or hourly pay because it's based on outcomes or revenue earned by employees.
2. What are the three broad types of sales incentive programs mentioned in the blog?
The three types are Performance based, Cash based, and Commission based sales incentive programs. Performance based rewards employees for hitting specific targets, Cash based rewards them based on the money they bring in, and Commission based rewards them based on the commission they generate.
3. Why do sales incentives matter, and how do they benefit businesses?
Sales incentives matter because they motivate sales teams, align individual and company goals, boost productivity, enhance employee retention, and foster healthy competition. They can also improve customer satisfaction and drive revenue growth.
4. What's a simple way to calculate sales incentives for employees, as mentioned in the blog?
To calculate sales incentives, start by calculating the Cost of Goods Sold (COGS) for your business. Then, subtract expenses related to selling the product or service from the COGS figure. Divide this result by revenue and multiply by 100 to get your sales incentive calculation.
5. What are some common mistakes to avoid when calculating sales incentives?
Common mistakes include not factoring in employee discounts or incentive bonuses, neglecting tax implications, not considering product tax status, misunderstanding commission types, and lacking reliable sales commission software to verify pay-outs and employee records.