salesmology.com . : uniquely simple sales management

ROI of a sales person, the revenue generation expectations relative to their compensation, can vary depending on factors such as:

• Industry and state of the market;
• Product and/or Service Margin;
• Sales Cycle (length of time from discovery-to-close);
• Payment Terms

But the company’s return on their investment in a sales person should always be a defined expectation, understood clearly from the beginning and reinforced regularly. The way to establish a reasonable ROI expectation for a sales person goes something like this:

1. [BASE RATE] + [MAX INCENTIVE COMP POTENTIAL] = Total Compensation Potential (TCP)
2. Determine the overall EBIT% of that sales person’s portfolio - or if you can’t determine EBIT that precisely, use the company’s percentage - to establish a reasonable rate of ROI relative to their true opportunity to produce. This percentage rate is what I call EIROI (Expected Individual ROI).
3. [TCP] x [EIROI%]: Take TCP and multiply it times EIROI to determine that sales person’s relative contribution in dollars (RCD).
4. RCD is important because it helps draw a financial parallel between the individual and the company.
5. The RCD factor is up to you, but a general guideline is that a sales person should be contributing 10 to 50 times their RCD.

Without doubt, the RCD factor must be high enough to break even.

Example: Robin is an account manager with TCP of $120,000 and a portfolio running at 15% EBIT. Her RCD, therefore, is $18,000. For her effort to provide a return she should be expected to hit 7 times her RCD, as a bare minimum, which is $126,000. Otherwise, her position isn’t netting the company enough to warrant having that position at all.

Think of it like this. If you had a machine that costs $120,000 and produces $126,000, you are only realizing $6,000 in earnings. You know your business better than anyone and are the ultimate judge of what RCD factor to apply as an expectation for each of your sales people. Make it personal, have the dialogue and energize your people to contribute and own it as their own business.

——————————————————
sales-mol-ogy (seylz-MOL-uh-jee) - noun: the science of simplified, practical application techniques and principles for highly effective 2 to 50 person revenue generation teams.