Question

Explain why rewarding sales personnel on the basis of total sales might not be in the best interests of a business whose goal is to maximize profits

Answer 1

Rewarding sales personnel on the basis of total sales will normally motivate the sales staff to expend their efforts promoting high-volume products, which will produce a large total amount of sales dollars. In some cases, more profit may be earned by promoting specialty products with lower sales volume but which have higher profit margins on each product sold.

For example, grocery stores must generate a large volume of sales to earn the same profit as a jewelry store, because the profit margin for the grocery industry is low, while the profit margin for the jewelry industry is high. A better measure of sales performance is the total dollar contribution margin of each salesperson (total sales less variable cost of goods sold and variable selling expenses) to overall company profit.