• January 8, 2008
  • By Marshall Lager, founder and managing principal, Third Idea Consulting; contributor, CRM magazine

Compensation Management Pays Off in Performance

Sales compensation management (SCM) is becoming ever more important on the list of essential business capabilities, but different levels of performance see improvements for different reasons. According to "Sales Compensation Management: Coin-Operated Productivity," a study recently compiled by Aberdeen Group from more than 130 companies, Best-in-Class organizations are driven by increasingly complex compensation plans (63 percent) and a need to increase market share (50 percent). Companies performing less efficiently, however -- classified as "Laggards" by Aberdeen -- find the most benefit from SCM when countering low sales productivity (47 percent) or reducing time spent administering incentive plans (52 percent). Aberdeen defines Best-in-Class as the top 20 percent of respondents, while Laggards make up the bottom 30 percent. The overwhelming majority (73 percent) of Industry-Average companies -- the other half of respondents -- said their top pressure was reduction of incentive-administration time. That factor serves as something of a reflex point for the Aberdeen study, separating the Best-in-Class (most of whom already have SCM in place) from the Laggards (who don't); "The Best-in-Class are pressured by the increasingly complex compensation plans they implement, made possible by SCM tools," says Gretchen Duhaime, senior research analyst with Aberdeen. "Laggards are limited by technology, often relying upon spreadsheets and handwritten notes, and are unable to implement complex plans." Overall, Best-in-Class companies are distinguished by four criteria, which Aberdeen used to define the segment:
  • 90 percent improved plan alignment with strategic goals;
  • 70 percent improved payment accuracy;
  • 45 percent improved sales force annual turnover; and
  • 41 percent improved sales force non-selling time.
Non-selling time is often spent "shadow accounting," or maintaining individual records as a check against the company's compensation system. "We see [salespeople engaged in] two types of shadow accounting," Duhaime says. "The first is tracking closed deals to make sure they get paid the amount they expect and when they expect it. The other is in forecasting, trying to predict which deals are most likely to close and for how much, and adjusting efforts accordingly to maximize commissions." For companies considering SCM initiatives, Aberdeen's recommendations are targeted according to where each firm lands on the Best-Average-Laggard continuum. Laggards are advised to:
  • Define and measure key metrics so that they actually understand their productivity and how it can be improved;
  • Implement process controls to ensure payment accuracy, thus saving some shadow accounting; and
  • Streamline compensation-plan design in order to reduce confusion.
The Industry-Average firms can improve performance by:
  • Providing commission forecasting to the sales force, further reducing non-selling time;
  • Empowering the sales force with commission-payment information, so they know why something was or wasn't paid; and
  • Centralizing compensation management function, so fewer hands are needed to make changes.
Lastly, the Best-in-Class can still improve performance by:
  • Automating compensation-plan design;
  • Adding noncash rewards to the compensation mix; and
  • Implementing analytics to support management decision-making.
While shadow accounting represents duplicated effort, it doesn't necessarily mean wasted time -- at least in cases where an adequate compensation management and design system isn't in place. "Companies might not know compensation-plan design can be automated, and can be used to align with corporate goals," Duhaime says. Indeed, Aberdeen says that only one-third of the Best-in-Class are currently using a plan-design system, though 44 percent say they intend to implement one within a year. Doing so, she says, "will make the Best-in-Class better able to turn their compensation system[s] to refocus on the sales force and its needs." Related articles: Re:Tooling -- Sales Compensation Management Business Problem: Inability to drive a sales force's behavior, rapidly deploy new sales plans, or effectively track and pay compensation and bonuses. Sales Incentive Software Set to See More Sales The market for incentive compensation management continues to expand, as more companies recognize its ability to drive growth. Feature: Pay Day You track your sales team's numbers -- and so does each member of the team. Here's what you need to know about the business of sales compensation, and how you can make it work for all of you. Incentives in an On-Demand World When it comes to software-as-a-service, automated incentives are their own reward. Leveraging Compensation to Drive Performance Strategic sales compensation management goes well beyond simply calculating commissions.
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