• October 1, 2007
  • By Marshall Lager, founder and managing principal, Third Idea Consulting; contributor, CRM magazine

Pay Day

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In the pages of CRM, we've shared with our readers -- you -- countless ways to boost sales, make better connections with customers, segment your marketing campaigns, and even motivate your employees. But we haven't touched too often on one of the key elements of maintaining an effective and eager sales team: keeping them paid -- on time, and accurately. We won't be discussing specific dollar amounts or particular commission schemata, of course -- that varies widely by industry, company, territory, and even by agent. But it's because of those very complexities that CRM
turns its eye to the topic of sales compensation management. What and Why Sales compensation management (SCM) may go by many names -- it's also called enterprise incentive management (EIM) or incentive compensation management (ICM), among other acronyms -- but it's universally central to your operations, for a reason that's painfully obvious: SCM deals with making sure your commission-based employees get what's coming to them in a timely and accurate manner. According to the most recent Gartner MarketScope for Sales Incentive Compensation Management Software, the category is composed of applications that "document remuneration plans, associated rules, and quotas for sales personnel (internal and external), and track and report on results and performance-based payments." These generally include "tools to model and analyze compensation strategies for influencing selling behaviors." In short, SCM applications let you plan, execute, and track payout schemata for your salespeople. You might think that all of this is already being taken care of by sales managers, the finance department, or some other people with insight into your accounting system. And you'd be right, in a way. But these people often must contend with complex product lists, requiring equally complex compensation schedules, with nothing more than a spreadsheet to manage it all. Complicating matters further is the other group that tracks these numbers: the salespeople themselves. It's called shadow accounting, and refers to the tracking of performance and expected pay separate from the company's system. It's another spreadsheet, another set of potential conflicts, and a lot of otherwise productive time spent not selling. But because of the current state of SCM in most companies, it's a necessary evil; people whose pay varies widely based on the number of deals they close are naturally going to want to know how much they can expect to earn in the next pay period, month, or quarter. Time's a-Wastin' "Salespeople can spend time either selling or not selling," says Andrew Boyd, senior vice president and research director for CRM and customer experience management with Aberdeen Group. "If they're not selling, what are they doing? We've picked up that a lot of their time is spent shadow-accounting. Reconciling multiple spreadsheets among the sellers, the managers, and the finance department is a huge task that eats up valuable time and resources." "Incentive management is a back-office issue with important front-office ramifications," says Denis Pombriant, founder and managing principal of Beagle Research Group. "On the back end, managers and finance spend lots of time and effort trying to set up and tally compensation plans, working nights and weekends to do it right. In the front office, salespeople spend up to two days [each month] on shadow accounting. And everybody has a different spreadsheet to tally sales, bonuses, and SPIFs," he says, referring to sales performance incentive funds. Having multiple versions of the truth is never ideal, but the complexities of compensation and bonus plans generally mean that each party is likely to have different results -- and those discrepancies must be reconciled. Pombriant says that spreadsheets and other disjointed, offline tracking methods create compensation bottlenecks. "With complex payout schemes, accounting can find itself running one special spreadsheet per person, which doesn't necessarily interact with the larger picture. Managers want to incent the proper sales behavior, but lack the database to back it up." Incenting proper sales behavior is a critical factor for businesses. The compensation system is one sure way for salespeople to know what the company wants them to focus on; compensation programs also motivate them to make their numbers. "The typical buying centers (such as sales or finance) are concerned with improving processes to define and track rewards for sales performance, specifically commissions and bonuses, as well as incentives for promotions," writes Michael Dunne, Gartner research vice president and author of the MarketScope report. "Sales ICM applications should help organizations gain efficiencies, insights, and versatility in creating, deploying, and administering compensation plans meant to guide and motivate direct and indirect sales personnel." Extending sales resources throughout the company is an emerging best practice, and there's some evidence that the industry is beginning to take notice (see sidebar, "The Payoff Looms for Paying Off"). But the benefits of SCM in the sales department are actually twofold. "There are sales process enablers -- things managers can do to make the workflow go smoothly in the department -- and individual enablers, which make each worker more efficient," Aberdeen's Boyd says. "SCM hits both." Even indirect sales personnel can benefit if you have the means to properly leverage company knowledge. "Non-commission people need compensation management, too," says Allison Stamm, research analyst for human capital management with Aberdeen. "As both initiatives grow, they start to come together into a single set of processes." Other technologies can also play a part -- for example, incentive management combined with social networking allows any employee to be a potential contributor to a sales effort, since anyone can provide insight, make introductions, or share specific expertise that the salesperson lacks, and receive a bonus for it. Robert Youngjohns, president and chief executive officer at Callidus Software, a provider of EIM and sales performance management (SPM) software, provides an anecdote that helps illuminate the issue: "Telcos try to measure sales reps on this magical thing called 'reducing churn,' but they don't have a clear definition of what that entails and can't do it," he says. "The second prime measure is selling new contracts or phones no matter what -- but this increases churn." A telecom company could spread out the responsibilities by using dedicated customer service reps to mollify at-risk customers and free up salespeople to sell new stuff to people who actually want it. Both would receive commissions for their successes, and if one managed to do the other's job, he'd get paid for that as well. Best Practices At this point, though, one of the smartest things to do about compensation management is simply to get some. "The best practice is to stop using spreadsheets and start to centralize the information," Boyd says. "The need to align employee behavior with company goals is especially important with sales, because they bring in the money," Stamm adds. Youngjohns illustrates their point with an example from his own experience. "I once was talking to a car salesman, and shopping for a discount. After several back-and-forth messages, he said, 'I'll give you that 2-to-3-percent price break if you fill out the dealership customer satisfaction form and give me straight As.' This told me his commission goes up more for doing well on his report card than the discount was worth." It's not always in the best interests of the company to let their agents make deals like this. Compensation management "lets people and organizations become more nimble," Stamm says. "If something isn't working right in the compensation plan, it can be quickly and easily fixed. New initiatives can be added as needed. This gives sales and finance a sandbox for designing the best and most effective compensation plans. It also improves morale; if the plans keep changing, nobody knows how to approach the day or what to sell hardest." It's also important to consider breaking out the data used for SCM into other parts of sales management. "Few companies have a system in place to tell them if they're spending salary expense efficiently," Youngjohns says. "How do I incent my sales team? How do I wrap analytics around it? The real value is for [companies that are] spending hundreds of millions of dollars on sales compensation but don't have any insight into the cause and effect -- spending $1 on compensation generates 'X' dollars' ROI in sales." Pombriant also believes analytics and data modeling are among the best practices for SCM. "Modeling feeds analytics," Pombriant says. "'Show me deals valued at greater than $100,000, which are likely to close this month, by territory' isn't a question you can get an answer to without good analytics." Meanwhile, he adds, "Incentive management lets you see what each seller is doing, so you can predict your pipeline, so you can make accurate forecasts, which in turn become projections for next year that you can track and refine. It's a self-feeding system." Sales compensation management is more than just a smart thing for your internal sales team, though; it's a weapon and a potential lifesaver for your entire corporation. "Among the companies with the most need for SCM are those with a large external sales force of brokers, agents, or dealers, spending large relative or absolute money on sales compensation," Youngjohns says. "In the insurance business, for example, the ability to pay brokers accurately and on time is a huge competitive advantage. If you mess up your direct sales, they won't be motivated, but if you mess up your dealers, they'll sell somebody else's product." Developments Compensation management is important enough on its own, but as with other aspects of enterprise software, it's not necessarily going to remain standalone. The sales application field is already showing signs of convergence, and the trend is toward combining SFA, incentive management, social networking, contract and proposal automation, and other aspects into a unified sales management suite. Gartner cites increasing interest "in sales performance management (SPM), which complements sales ICM by integrating functions for planning, designing, allocating, and managing sales territories, quotas, and compensation plans," as a prevailing trend through the next two years. "Best-of-breed vendors will be at the vanguard in generating interest in this market, expanding functionality and offering solutions through alternate delivery models." According to Boyd, Aberdeen's view on the growth and confluence of sales-focused applications is similar. "There is serious convergence between sales compensation management, sales effectiveness management, and human capital management," he says. A July 2007 Aberdeen report (see charts, below) showed where the companies identified as best-in-class will be spending their sales management budgets.
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"It's an easy jump to assume that a company that can provide several or all of these functions -- and do them well -- will have a highly compelling offering for sales organizations. Youngjohns, whose company is aiming to drive the convergence of compensation and other aspects into sales effectiveness, certainly agrees. "Sales compensation management is part of a broader process -- sales performance management -- focused on what's happening among agents and territories to try to understand what palette I have available," he says. Still, he adds, "There's a huge potential for making mistakes even with the proper tools in place. Tools don't stop people from failing to think through their business processes." However, a sensible compensation plan will prevent that, so don't be afraid to ask for help. SIDEBAR: The Payoff Looms for Paying Off Gartner estimates that only 5 percent of sales organizations have deployed sales compensation management, but the market is poised for considerable growth. Some of the key factors listed in the report include:
  • Low market penetration, with most organizations still employing Excel or home-built solutions;
  • Large enterprises migrating from inflexible, unmanageable custom-built solutions or upgrading older prepackaged application installations;
  • A need to improve compensation support for complex selling models, team selling, and partner channels, particularly plan creation and administration, as well as reporting for sharing commission details;
  • A desire to improve governance of outlays for leveraged resources (particularly when commission costs exceed the equivalent of 5 percent of revenue);
  • Greater spending in key vertical industries, such as insurance, communications, and high tech;
  • Increasing interest in the software-as-a-service delivery model, which has made solutions appear more accessible to a broader audience, thereby increasing deal flow; and
  • Demonstrated value of systems in producing operational efficiencies (reduce errors by more than 90 percent, and reduce administrative and technology staffing requirements by more than 50 percent).
Source: Gartner, "MarketScope for Sales Incentive Compensation Management Software, 2007" SIDEBAR: Insider Assessment Bob Conlin, chief marketing officer at Burlington, Mass.-based Centive, a vendor of software that automates incentive compensation management (ICM), writes about the recent surge in industry analyst reports on the topic of ICM, as well as trends in the industry and companies that have recently implemented automated compensation software: Industry analyst firms at all levels, such as boutique outfits like Ventana Research and SiriusDecisions, as well as major players like Gartner, IDC, and Forrester, have either issued or are in the process of issuing research reports on ICM in 2007. Gartner's recent "MarketScope for Sales Incentive Compensation Management Software, 2007" estimates the sales compensation management (SCM) software market captured approximately $250 million in revenue worldwide in 2006, and continues to grow "by at least 15 percent year over year." Joe Galvin, vice president and research director at SiriusDecisions, attributes the increasing interest in SCM to the availability of advancing solutions that provide measurable results. "Sales ICM systems are gaining significant traction in the marketplace," Galvin says. "Companies are increasingly realizing the direct and measurable impact these systems have on overall performance, due to their ability to provide sales representatives and managers with real-time visibility into sales attainment and performance data." Although most companies still rely on spreadsheets, companies of all sizes are increasingly turning to on-demand SCM as they hear about the tangible sales performance benefits to be gained, and because of the comparatively low risk associated with deploying on-demand solutions -- there is no software to purchase, install, or maintain and no huge up-front license fees requiring capital expense approval. For example, the North American sales force at Draeger Medical, which counts among the Top Three worldwide in the business of acute-care products and solutions, recently began using Centive Compel in place of spreadsheets to automate its SCM processes. Draeger now uses Compel, which was up and running in just 36 business days, to model sales compensation plans, forecast commission costs, and automate day-to-day plan management. The company's sales representatives and sales management now have secure dashboards that provide real-time visibility into key performance metrics, as well as reporting and executive analytics features to support in-depth analysis of individual and team performance. Draeger's finance executives also like the new on-demand software, since it supports their financial-compliance initiatives for commission accounting -- and because it provides an accurate and secure solution hosted in an environment compliant with SAS 70 Type II, a widely recognized professional audit standard. ("SAS" stands for Statement on Auditing Standards.) Contact Senior Editor Marshall Lager at mlager@destinationCRMcom.
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