Bringing Sales Compensation Management into the 21st Century
Sales compensation remains the most significant cost center yet to be automated. In fact, the key system responsible for driving sales performance in most companies is typically a series of Excel-based spreadsheets or an outdated, legacy home-grown application. Why, then, when it comes to implementing sales compensation management systems, is it an afterthought for most execs?
Antiquated comp systems do not provide the real-time visibility executives need to be strategic and sales reps need to stay focused on selling. Without this visibility into performance data--by division, by territory, by product, and by rep--you can't make the adjustments you need in time to keep business on track. And in terms of compliance, spreadsheet-based solutions are wholly inadequate in meeting corporate governance requirements for systems related to a company's financial reporting. These systems lack an automated, standardized process for calculating commissions. With no valid audit trail, inadequate security, and questionable accuracy, organizations using homegrown systems face noncompliance issues that could put the company and its shareholders at risk.
Sales compensation is an Achilles' heel for companies of all sizes, particularly those with complex compensation structures like splits, ramped rates, and overrides. For most companies, calculating and paying incentive-based compensation is a data-intensive, calculation-intensive, tedious, and thankless task that can consume hours of time for teams of compensation analysts, corporate and sales controllers, and sales administrators.
Consider the following scenario: A publicly traded, highly diversified $500 million medical products manufacturing firm has five separate divisions, each with 40 sales representatives who are divided by territory. Each division has a different compensation plan: Some call for split commissions and team sales by account. The company has 1,500 different products; some are sold by multiple divisions. Fifty percent of the sales commission is paid upon receipt of a signed contract; the other half is paid upon product shipment. All plans have charge-back provisions if products are returned. There are quarterly bonuses and monthly SPIFs on top of the annual quota. Sales of certain older products earn commission, but do not apply toward the sales representative's quota. Company-wide, new reps receive a recoverable draw (bridge loan) of $3,000 a month for their first six months. The company processes about 50,000 sales transactions each month, originating in multiple, disparate systems.
The number of spreadsheets and embedded macros necessary to simply calculate commission payments in this relatively standard scenario is mind-boggling. Imagine what happens when a new product is introduced, or organizational hierarchy changes are made, or new compensation plans need to be implemented.
It typically takes weeks, or even months, to implement these changes. In the meantime, sales teams become misaligned as obsolete plans drive the wrong behaviors. Revenue opportunities are missed, or worse, lost to competitors. And, once the plans are in place, sales reps usually have no corporate-provided insight into their commission earnings until days or weeks after the close of the period. So, they waste valuable hours of selling time on shadow accounting--managing their own spreadsheets to track their sales--and then waste even more time reconciling their spreadsheet with the commission statement they finally receive. The cycle repeats, sales performance suffers, opportunities are lost, and revenue is negatively impacted.
Gartner reported that companies failing to execute sales compensation effectively and on time will decrease sales productivity by 20 percent due to lost selling time, reduced motivation, and shadow accounting. In the scenario above the 200 salespeople could waste as many as 1,600 hours per month--roughly the monthly time equivalent of nine full-time salespeople.
Another issue: Compensation plan models built with spreadsheets are difficult for anyone other than the person who built them to understand. Spreadsheets are designed for a single user. With their macros and cryptic cell-based formulas, they are also fragile and difficult to change as business conditions change. What's more, they cannot adequately handle true enterprise-class data volumes, or "remember" what has changed within each cell over time. Spreadsheet-fronted legacy applications can be just as problematic, requiring lots of IT investment and manual intervention, which slows the compensation management process down. In fact, the manual processes involved in calculating incentive pay typically consume more than one person-month per pay period, time that could be spent on devising new incentive programs, analyzing the effectiveness of different initiatives, or optimizing the corporate compensation plan.
Spreadsheets are not designed to provide the proper reporting and auditing required for transactional-based activities. Without this reporting, there is no true accountability; finance executives lack real-time information, sales managers cannot get timely visibility into results, and employees cannot measure their performance against their plan or their peers.
Legacy and spreadsheet applications used for incentive compensation management are also expensive to maintain. Medium to large companies spend an average of $2,500 for each employee on plans managed by these applications, according to a study by Growth Solutions. Direct costs represent half of the $2,500 and would be significantly reduced with an automated system. The other half are indirect opportunity costs that impact the bottom line. These costs would be completely eliminated with an automated system.
By automating sales compensation management, significant value is added to the entire sales process. Automation eliminates repetitive, labor-intensive, error-prone manual processes while providing accurate, timely, and auditable commission, ranking, and attainment information. With information they trust, sales reps can stay motivated and focused on selling.
About the Author
Michael Torto is the president and CEO of Centive. He is responsible for corporate strategy, management, and growth. Prior to joining Centive, Torto served as president and CEO of InCert Software, Cambridge, Massachusetts. Leading InCert, Torto successfully transitioned the company and its product strategy from a start-up offering OS/390-based point solutions to a leading software provider delivering scalable, high performance Windows, Unix, C++, and Java-based offerings in under 12 months. As a result of his leadership and strategic direction, InCert landed significant first year contracts, ultimately leading to the company's merger with Geodesic Systems in 2002. He can be reached at mtorto@centive.com