Sales Commissions: Revenue-based or Profit-based?

SCENARIO: You're setting up a sales force for a new product in a newly-developing industry. You've got plenty of sales technology to slice and dice your sales and customer data.

However, your CEO and your CFO (they're both equal owners of the firm) have differing opinions about how to compensate your sales team.

The CEO wants commissions to be based on the revenue that each sales rep generates. He figures that if they sales rep focuses on the big number, it's up to the rest of the company to ensure that the overall business model is profitable.

The CFO wants commissions to be based upon the profitability of each sale, and is willing to provide the sales team with a portal on their mobile CRM system so they can check the profitability of every deal before they write the contract.

CLICK for my opinion »


I'm going to agree with the CFO on this one and establish commissions based upon profit. I'll explain why I think this is a good idea by telling you a true-life story.

I have a good friend -- a very talented sales guy -- who was absolutely convinced his employer was cheating him. He had made a hundred sales in three months, but wasn't getting paid his commissions. Meanwhile, his coworker was getting big bucks, even though she had made but a single sale during the same period.

On the surface, it seemed that he had every reason to be upset, except that each of those hundred sales that he had made was costing the company more than the revenue those sales generated. In fact, the only profitable deal on the company's books was the one his coworker had signed.

Management tried to explain their position to my friend but, as Upton Sinclair famously wrote: "It's hard to make someone understand something if his salary depends on him not understanding it." My friend quit the job in frustration and disgust.

You may think that my friend was being obtuse, but his attitude is far from unique. Many sales reps (and many sales managers, for that matter) tend to see revenue as the ultimate, indeed the only, goal of a sales team.

In the quest to "make the numbers" it's all too easy to forget that, if you're losing money on the average sale, the more you sell, the more you lose. The solution, of course, is to compensate sales reps on profit rather than on revenue.

But few companies do that, but that's because sales reps and managers alike often don't know how to figure out the profit inherent in each sale. However, with today's technology that's no longer impossible or even particularly difficult.

Now, it's true that compensation on profit could make it difficult to develop "loss-leader" accounts that are unprofitable at first, but have the potential to be big earners in the future. However, such cases can be handled as a "strategic exception" to the rule.

So, assuming that everything is on the "up and up" and management isn't going to somehow make profit "disappear" into the accounting system in order to screw the sales team out of their commissions, I think that compensating on profit is the best way to go.

READERS: If you disagree, please comment, because I'm not 100 percent wedded to this viewpoint.