SoftwareSalesJobs
Leveraging Compensation to Drive Sales
by Bob Conlin
A high-profile technology company CEO stands before a hostile gathering at a shareholder’s meeting, offering an embarrassing explanation as to why the company’s profit numbers were well below projections - "We have had compensation systems that failed to drive superior performance.” BusinessWeek reports in a follow-up story that “Costs…jumped in part because of new sales commissions... Salespeople hit quotas by focusing on lower margin products. Now management is recalibrating commission plans to drive higher-margin goods like software."
The scenario above is real. The failure of sale compensation programs to drive sales performance occurs in companies of all sizes far too often. Software sales executives, like their peers in other industries, 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 software sales and finance executives by Growth Solutions, an Illinois sales compensation design firm, and Arcadia Solutions, a Boston sales effectiveness consultancy, reveal some startling and disturbing statistics:
While 92% of executives believe they are calculating and paying commissions accurately…
- 72% believe it takes too long to get commission payments out – often 30 or more days after the close of a period*
- 76% believe their sales compensation systems fail to drive behavior or align their teams towards specific goals related to products and services*
- 67% described the “pain” associated with commission management as somewhere between chronic and acute*
- 88% say plan effectiveness is a critical issue**
*Source – Growth Solutions
**Source – Arcadia Solutions
On average, companies allocate nearly 10% of corporate revenue for compensation 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 apparently not necessarily the right sales. Clearly there is a gap between the performance desired at a granular level - by product, margin, territory, etc - and the ability of incumbent sales compensation programs 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. As noted above, some key pain points include:
- The time it takes to accurately produce commission statements and commission checks. For many companies, commissions are paid 30 days or more after the close of a period. What’s more, the commission period is often longer than desired due to the work involved in calculating commissions. Slightly more than half of the respondents indicated they pay commission quarterly, but would pay monthly if they could. Best practice dictates that reward and behavior are closely linked; in the spreadsheet world that often simply is not possible.
- Sales compensation plans do not align the activities of the sales reps with the goals of the company. Let’s face it, reps learn to game their plan to ensure maximum commissions, so plans need to be adjusted periodically as businesses respond to various market influences. However, 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 their reliance on IT to adjust the complex macros needed to meet plan logic requirements. Several companies reported paying off old plans or 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 the company’s 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. Users should be able to model various plan scenarios to see how changes to rates, organization structures and other plan elements may affect compensation costs. 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 such as 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 4 to 8 hours of selling time per rep each period, leading to dramatic increases in productivity and revenue.
The sales compensation system should also be tightly integrated with CRM so that reps have visibility into not only actual earnings, but also potential earnings based on deals in their pipeline. They system should enable reps to apply filters so that only pipeline deals that meet specific criteria are evaluated. Providing this level of integration and visibility – from prospect to paycheck - motivates your reps to achieve peak performance and, as a bonus, encourages them to be more diligent in maintaining accurate deal size and close date information in the CRM system.
Managers also need visibility into the performance of their team – and they need it in time to make a difference. To paraphrase Peter Drucker, you can only manage what you can measure. Unfortunately, most sales managers have no real-time access to tangible sales performance metrics. They get stack rankings and revenue reports at the end of each period, similar to the delivery of commission reports. Managers should have quick, easy access to performance reports and analytics on a daily basis so they are better prepared to manage their teams, develop strategies with their reps, and identify weaknesses before its too late.
So 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 3 choices:
- Subscribe to a "on-demand" sales compensation management solution
- Advantages – true on-demand systems (beware hosted versions of on-premise applications) offer the lowest cost and low risk since there is no software to license, install or maintain – service is provided on a subscription basis.
- Disadvantages – none compared to Excel-based systems. May not be the desired solution for very large companies with tens of thousands of sales reps.
- Buy "on-premise" Enterprise Incentive Management (EIM) software – available from best-of-breed vendors and enterprise software companies
- Advantages – extremely flexible and customizable, can usually be configured to meet your requirement today and tomorrow
- Disadvantage – big upfront costs, expensive to license and install ($500,000 or more with 6-10 month implementations). Requires significant IT support.
- Build an automated system
- Advantages – built to meet your specific requirements
- 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
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 true sales performance tool.
Robert Conlin is Chief Marketing Officer of Centive. With over 15 years of sales and marketing executive experience and over five years at Centive, Robert has proven expertise in Sales, Marketing and Sales Compensation Management best practices. Robert’s vision for developing the industry’s first on-demand sales compensation management solution led to the release in 2005 of Centive Compel, winner of the 2006 CODiE Award for Best Financial Application. Robert is a frequent speaker at industry events and has been published in numerous business journals including Benefits and Compensation Solutions, Workspan, National Underwriter, HR.com, Compensation and Benefits Review and Technology for Finance. He received a bachelor's degree in resource management from Oregon State University. He is accredited as a Professional in Human Resources by the Society for Human Resource Management. For article feedback, contact Robert at bconlin@centive.com
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