Strategic sales compensation management goes well beyond simply calculating commissions.
Posted Oct 1, 2006
Sales executives have long embraced the vision of leveraging incentive compensation to drive performance within their sales teams. In this vision commissions are the reward, the proverbial carrot used to motivate reps to achieve and exceed specific revenue and performance metrics. But the gap between vision and reality is apparently deep and wide.
Two recent surveys of senior sales and finance executives reveal some startling, disturbing statistics:
While 92 percent of executives believe they are calculating and paying commissions accurately
72 percent believe it takes too long to get commission payments out--often 30 or more days after the close of a period
68 percent believe their sales compensation systems fail to drive behavior or align their teams towards specific goals related to products and services.
68 percent described the "pain" associated with commission management as somewhere between chronic and acute
87 percent attribute turnover of their top reps with issues related to commission compensation
In general, companies allocate nearly 10 percent of corporate revenue for commission costs. Given the investment, it's astonishing to learn that more than two-thirds of the executives surveyed believe their commission system does little to motivate behavior, align their reps with corporate goals, or drive sales performance in a meaningful or measurable way. Companies are paying commissions to reps for closing sales, but not necessarily the right sales. Clearly there is a gap between the performance desired at a granular level--by product, margin, territory, et cetera--and the ability of incumbent sales compensation systems to support that performance.
This gap exists because companies have relied for too long on inadequate systems for managing sales compensation. Excel spreadsheets are the de facto standard for sales compensation; they are also the most commonly attributed source of "pain" associated with sales compensation management. Survey respondents relying on spreadsheets reported significant delays in modeling and rolling out new plans each year, or modifying existing plans mid-year, due to the complex macros needed to meet plan logic requirements. Several companies reported paying draws for over 3 months at the start of each year while new plans were being coded and tested.
So how should sales compensation work? First, compensation plans should be designed so as to ensure that reps are motivated to sell in alignment with corporate product, service, and revenue goals. Then, the plans should be managed in an automated sales compensation management system that enables them to be quickly deployed and easily modified--without IT support. The system should provide transparency into the compensation process, accuracy in calculations, audit tracking of all changes, visibility into daily performance metrics, and timely reporting and payment of all commissions and bonuses.
When sales compensation is properly managed, reps will be motivated by their plan and focused on closing the right business at the right price. When reps gain visibility into individual performance metrics like attainment and earnings to date, many of the disputes and trust issues associated with sales compensation go away. The analyst firm Gartner reported that organizations that provide this level of visibility gain four to eight hours of selling time per rep each period, leading to dramatic increases in productivity and better control of turnover.
Where do you turn to leverage sales compensation to drive performance, eliminate disputes and payment errors, and generate increased revenues and profits? You really have three choices:
1. Build an automated system
a. Advantages--built to meet your specific requirements
b. Disadvantages--requires huge commitment from internal IT resources who may or may not have sufficient domain knowledge to anticipate, design, and build a system with the flexibility to change as your business grows and changes
2. Buy "on-premise" enterprise incentive management (EIM) software--available from best-of-breed vendors and enterprise software companies
a. Advantages--extremely flexible and customizable, can usually be configured to meet your requirement today and tomorrow
b. Disadvantages--big upfront costs, expensive to license and install ($500,000 or more with six-to-10 month implementations). Requires significant IT support.
3. Subscribe to an on-demand sales compensation management solution
a. Advantages--true on-demand systems (beware hosted versions of on-premise applications) offer low cost and low risk since there is no software to license, install, or maintain--service is provided on a subscription basis.
b. Disadvantages--none compared to Excel-based systems. May not be the desired solution for very large companies with tens of thousands of sales reps.
If your sales organization is like most, you have commission pain associated with accuracy, trust, and system management issues. But more importantly, your organization isn't leveraging sales compensation strategically to drive sales performance. You have choices, so explore them today to realize your vision for sales compensation as a performance tool.
About the Author
Michael Torto is president and CEO of Centive. Please visit www.centive.com
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