Do you measure the true profitability of your individual contributors rather than just their sales? Many companies look at how much salespeople generate instead of how much money they actually make for the company. Several calculations come into play in determining true profitability of a sales rep.
Margin. For example, say your top producer, Sales Rep A, brings in $2.0 million in gross sales while your average rep is at $1.5 million. But let’s say that the margin of sales rep A is 12% and your average person is at 16%. With those numbers, A’s margin is $240,000, the same as your average rep.
Contribution (margin less total compensation cost). The total compensation cost for A, which includes base salary, commission, payroll taxes and workers’ comp is $160,000 due to his longevity and high base salary, while the average rep is at $140,000. Thus, the contribution, from sales rep A is $80,000, while the average sales rep is $100,000.
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Overhead. The next step might be to determine how much overhead each sales rep has to absorb to make a profit. Let’s say that the company’s overhead (all expenses other than the cost of your sales reps) is $600,000, and you have 10 sales reps. That means that each person has to bring in $60,000 for you just to break even. Sales rep A’s full absorption profit is $20,000, while the average rep is at $40,000 — or twice that of your “top” producer when taking their relative profitability into account. Put another way, you have a 1% profit on sales for rep A compared with 2.7% for your average rep.
When setting up compensation plans it might be a good idea to look at the proverbial bottom line of what a person generates not just the gross sales that they bring in. In this example, we were paying a lot more to retain a “high producer” than may be warranted. Think of this as the equivalent of the famous movie Money Ball, where the Oakland Athletics baseball team focused on assembling a team of players based on unbiased performance analytics and metrics. Instead of signing overvalued players, they instead looked at the bottom line of what their players were producing. This approach then became the standard that many other teams emulated.
Staffing businesses should consider doing the same.
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