The Services Compensation Deception

March 21, 2012 — Leave a comment

Resellers can’t compensate sales people on revenue…

Chances are you compensate on gross profit (GP) if you manage a reseller sales team – and it goes without saying, if you are in sales, your compensation is based on GP.  But there is a bit of deception here that will take a business from profitable to unprofitable very quickly.  There are two places where money continues to leak from retained earnings – 2 holes in the bottom of the ship.

The one I am concerned about here deals with services compensation.

Speaking to Business Owners and Managers

Speaking to owners, VAR presidents, and sales management, are your sales people really paid on GP when it comes to services?  If you pay out based on services revenue, you are killing your company.  If you pay based on projected GP:  (sale price) – burden, you may still be paying on revenue.  Here is what I see happening…

The deal is sold for $1600 (as an example).  If the project is estimated to take 8 hours, the burden might approximate to $800 (using round numbers – yours will vary).  So the GP on the deal is simply $800, and the rep gets a percentage of this.   But what if the actual project time spent on the project is 2 hours over?  Is the cost of the project recalculated, raising the burden to $1000, and leaving only $600 in GP?  It should be.  If you keep the rep whole – by paying them on their estimate, this is actually still a revenue based payout, just at a different percentage than you pay on other things.  It’s revenue because you are not actually counting the true cost.

The Sales Person’s Perspective

The sales person at this point might argue, “But I don’t control the efficiencies of the delivery team, therefore I cannot be held responsible for the loss of GP.”  This is a valid point, but neither can the rep control the street price on product, yet GP is still the metric used for compensation.  When the sales person is compensated without taking the actual invoiced services into account, the company suffers financially.  My advice is to move your compensation to actual GP, and train sales people to value price their deals (meaning you are using fixed prices).  Chances are you can’t bill any significant overage anyway, so why fight this.  Sales managers should also be reporting GP by project on a regular basis to see which reps are accurately quoting services deals.  In most cases I find there is a pattern here.  One group will be on target, and this change won’t really affect them.  Another group will likely have a track record of under-quoting.  This group will resist the change, but the change is necessary.

But First

Before doing anything, make sure your top sales people’s projects are reviewed, and that you have a way to make sure they continue to make good money.  You don’t want to lose them.  Those who are mediocre or poor in performance, may leave – that’s actually good.  Redistribute your territories, rebuild your profits, and when the time is right, replace those who have left.  Your financial picture can be turned around in a matter of a few months.

© 2012, David Stelzl

 

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