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.
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.
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.