Incentive compensation is often the first place where management makes adjustments in efforts to improve sales productivity. Many organizations have departed from the straight commission model in favor of plans that prompt the sales force to target high-profit deals.
However, when a salesperson is paid a flat percentage of top-line revenue, it is easy to project what the commission check will be and plan accordingly. Straight commission plans are also less burdensome for the back-office staff to administer. More complex plans require process adjustments, often provided for in the form of a sales compensation management solution.
In the recent Aberdeen Group benchmark report, “Sales Effectiveness: Getting Sales Back to Selling,” 60 percent of Best-in-Class companies surveyed indicated that they currently use an incentive compensation management solution. Nearly half of all companies are tying compensation to performance metrics, as shown in a survey for an upcoming benchmark report on sales and marketing alignment.
In the broader context of Aberdeen’s “Incentive Compensation Management: Aligning Compensation with Business Goals” study, 76 percent of companies surveyed were able to give performance feedback to employees. Effectively managing incentive compensation benefits both the sales force and the support groups responsible for plan administration. An upcoming Aberdeen study will provide companies with insight to how Best-in-Class companies improve sales productivity and reduce time spent on back-end processing.
Compensation = Motivation
Compensation is near and dear to every sales person’s heart. Though some may be motivated by the glory of being number one or surpassing quota, the bottom line is the money in their pocket. Companies need to motivate the sales force to drive sales and market share in line with overall goals. This can present the challenge of complex incentive plans requiring weeks of tracking down data and performing calculations. During this time, the sales force has little insight into how much they can expect in their commission check.
Aberdeen’s hypothesis is that the predominant pressure driving compensation management is the need to increase sales productivity. The straight commission model is rigid, providing no means for reducing the cost per sale. Implementing a plan tailored to specific business drivers can help, but it requires clear performance goals and a formalized process for calculating incentive payments. Companies must design plans that have an accretive effect on operating margins.
Beyond increasing the bottom line, companies are also pressured to attract and retain top sales talent. Difficult or complex plans might hinder recruitment efforts. Plans that require a higher level of effort than expected to achieve the baseline payments will result in elevated attrition, leading to a vicious cycle of endless recruitment.
Aberdeen’s hypothesis is that Best-in-Class companies will provide scenario-building and forecasting to their sales force, as well as conducting performance reviews regularly. This will give clear direction to achieve both quantitative results in the form of compensation as well as qualitative results that follow glowing performance reviews, such as a lucrative account package.
The Role of Risk and Compliance
More stringent regulatory requirements dictate consistently designed incentive programs and a secure location for storing the payment records. Industry and governmental regulations require documentation both of plan approval and acceptance as well as payment calculation and audit history. With offline documents and spreadsheets, this task is difficult if not impossible. Aberdeen predicts that research will reveal this as another driver behind compensation management solution adoption.
Minimizing nonselling time is a priority for Best-in-Class companies recently surveyed by Aberdeen. Reducing the need for shadow accounting can reclaim many hours for revenue-producing tasks. An effective reporting tool that shows reps the sales comprising their past commission checks will accomplish this, as well as relieving managers and administrative staff of the duty of tracking down answers to commission questions.
In addition to the strategies mentioned above, sales organizations may also turn to sales contest and noncash reward programs as a way to motivate specific selling behaviors. Contests can quickly motivate reps to sell a lagging product or service, and can be turned on and off as needed. Again, companies need to formalize these processes and track for tax and audit purposes.
Aberdeen’s research will test whether technology should be deployed to manage incentive compensation payments. We anticipate that a combination of strategic actions and new technologies can be used to extend or augment CRM, sales force automation (SFA) or other customer management systems that are already in place, as well as integrating with existing payroll and human resource systems. These actions include:
- Automate incentive compensation plan creation and maintenance. Plan automation reduces the burden on sales and administrative staff, and provides flexibility to adjust to changing business drivers.
- Align performance targets with business objectives. Incentive compensation management solutions provide the ability to track metrics and utilize in payment calculations more effectively than spreadsheets. The sky is the limit, but sales still needs to understand how to achieve the highest payout.
- Provide reporting and forecasting to the sales force. Not only will it reduce nonselling time, but individuals will have a better understanding of how to maximize their own bottom line.
- Maintain consistent, detailed records. Industry and government regulations require audit trails and documentation.
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Gretchen Duhaime is a senior research analyst in the customer management technology practice at the Aberdeen Group. Her research focuses on sales effectiveness. She can be reached at email@example.com.