Sales Incentive Calculation: Stop making these mistakes while making Sales Incentive Calculations

Sales incentive calculation is the process of determining the amount of money or other rewards that a salesperson will receive based on their sales performance. This typically involves setting sales targets and then determining the amount of the incentive based on how well the salesperson meets or exceeds those targets. The exact calculation method can vary depending on the specific sales incentive program, but it often involves a combination of factors such as the number of sales, the profit margin on those sales, and the salesperson's individual performance. Some companies may also use a tiered system, where salespeople who exceed their targets by a certain amount receive a higher incentive.

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.

Read Also: The Step-By-Step  Guide to Designing a Sales Incentive Plan

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

Pros 

  • 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.

Read Also: Five Hacks For  Performance Improvement

  • Competitive Advantage: Fosters healthy internal competition.
  • Flexibility: Can be customized to suit company needs.
  • Retention: Attractive incentives can improve employee retention.

 

Cons

  • 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.

Conclusion

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.

Also Read: Sales Incentive Structure: How to Design a Sales Incentive Structure in 2023

Find out how Compport can help you manage all your Sales Incentive process, book a demo today!

Frequently Asked Questions (FAQs)

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.

Share this post

Recommended articles

May 3, 2024

Rethinking Rewards: Continuous Reviews for the Equitable Workplace

It's time for companies to shift gears and use continuous compensation reviews to fuel engagement and fair compensation at the workplace
Read More
April 1, 2024

Understanding Total Compensation: Beyond the Salary

Discover the holistic view of total compensation beyond salary. Learn its components, importance, and how to calculate it effectively.
Read More
April 1, 2024

The Future of Work: 4 Key Total Rewards Trends You Can’t Ignore

The landscape of total rewards is evolving. For the younger generation, the emphasis is on personalization, instant recognition for their efforts, and a holistic well-being focus. HR leaders need to design a data-driven total rewards program to match the employees' preferences
Read More
LETS Talk

Learn how Compport can help your team

Get a Demo