Why focus on Administration?
Lots of people work
in sales and sales related jobs. Depending on vertical sector and country commonly
accepted numbers range from 1 in 9 to 1 in 16 people work in sales. According
to the United States Department of Labor2 the percent of the
workforce that has a sales or sales related job in May 2013 is 10.61
(relatively unchanged from 2000 and 2005 at 10.41% 10.69% respectively)
Sales Compensation is
well funded. In a July–August 2012 Harvard Business Review article1 titled,
“Motivating Salespeople: What Really Works” an estimated $800B per year is
spend on sales compensation by U.S. companies in the form of commissions and
bonuses. $800 Billion dollars is a
staggering number. Looking at 2012 as a
baseline year to compare the $800B est. to U.S. corporate revenue the
percentage of revenue spend on sales compensation to top line revenue is
approx. 5.33%. 3 In a sales organization focused survey done
by CSO Insights they showed sales compensation spend as a percentage of annual
revenues at 11.5 percent4. The actual percentage of course will vary
considerably business to business but it is a material budget line item that if
managed appropriate can lead to success and if managed poorly can lead to
sub-optimal results or business failure.
The purpose of incentive pay has many purposes – recruitment,
retention, motivation of behaviors and to reward performance. Corporate leaders have bought into the idea
for both sales and non-sales roles that pay for performance, variable pay or
incentive pay (Term usage can vary widely) can drive top line performance. Both behavioral economics theory and real
world performance have shown that a well-constructed compensation plan aligning
corporate strategy to individual, team or corporate goals can motive employees’
behaviors in a desired fashion.
So what’s the problem?
Its difficult
administer sales compensation. Poor
upstream data quality, inflexible technology, inefficient processes, highly
manual processes, decentralized operations, and limited reporting are some of
the more common factors that lead to sub-optimal administration. Incentive compensation can part of a
well-designed compensation plan and be well funded but survey research shows
that the execution or administration of the incentive plan falls far short of
perfection. On the low side studies indicate a 3-5%
percent over-payment of commissions5. Gartner research shows an even higher 3-8%
error rate6 in administrating sales compensation. Don’t forget that reported errors are
generally when the employee is underpaid while over-payments are rarely
reported.
Incentive payments can be incorrect, late, or lose their
motivational potential when businesses are unable through reporting to explain
to employees how their individual payments were calculated or where their
potential earnings stand at any point in time.
Beyond the easily calculated hard dollar impact these accuracy problems lead
to lower employee morale, lack of trust, less than optimal performance, lost
sales time due to shadow accounting, lead to unwanted employee turnover and
difficulty in recruitment. Worse yet,
organizations in highly regulated organizations can be out of compliance and
subject to fines.
With a large budget item like incentive compensation we want
to be sure that we are maximizing the return on investing by using best
practices for administration. To be
successful the classic business triangle of people, process and technology all
need to be working in harmony
Is there a solution?
To be successful the classic business triangle of people,
process and technology all need to be working in harmony To start determine your organization
current state we must critically look at the administration of compensation and
determine how well the overall management program is working as well as uncover
potential areas of improvement.
In the self-assessment to follow we will looking at process
maturity as the key area to incentive compensation administration success and
give you a scoring model to attribute a score to your current process. At the end of the assessment there will be a
summary of next steps depending on your organizations score.
Sales Compensation Administration Capability
Process Steps
The process is the foundation for success in administering
compensation. Best practices for
compensation administration are to have a well-defined process with clear
ownership, well understood criteria for success and accountability. Most organizations will have some version of
the following process to administer compensation.
Step 1: Collect Data – Data to drive the incentive
compensation calculation must be gathered.
This can be fully or partially automated or a wholly manual
process. Inbound data into the system
generally comes in two types – transactional and referential. Transactions are the business events that
your organization will compensate on – it could be revenue, invoice, bookings,
customer satisfaction, units, etc.
Reference data can take a wide variety of forms depending on the
complexity of the compensation programs but essentially it is people data –
quotas / goals, territories, start date, leave status, termination date, position,
role, title, base pay, payment currency, etc.
Number of data feeds to support incentives can range hierarchy, product
data, etc. from 1-2 feeds to well over
100 source systems. The data collection
can be done in batches based primarily on availability, and secondarily on
desired payment and reporting frequency.
Step 2: Crediting – Crediting is determining, “who gets paid
for what”. An example of simple
crediting is when a sales representative id is part of a sales
transaction. Crediting can become an
extremely complex problem if there are territories built on multiple dimensions
and frequent changes. The complexity
can be off the charts when you start to include unique splits, overlays,
historical roll-up from sales representative to managers, third party data,
etc.
Step 3: Calculation – This is the math portion of the
calculation. Applying the business
rules of the compensation plan to the data and determining a payout less any
potential monies owed from a draw or previous over-payment.
Step 4: Payroll – The sub-process of getting the right
information in the correct format to payroll or AP for external payees.
Step 5: Reporting and Analytics – Reporting can be for the
plan participants, management, or the administrative team. It includes producing a standard set of
reports to communicate activity and / or payout amounts such as a compensation
statement and the drill to detail of the underlying transactions. The step also includes ad-hoc reports and
the reporting to analyze plan effectiveness and administration efficiency.
Step 6: Dispute
Resolution –If payments are incorrect, how the payees submit an inquiry or
dispute and the steps to resolve the issue.
IF you are missing
any of the step described above that is a clear indication of less than fully
mature process and something that must be addressed before digging deeper in
capability.
Self-Assessment
Below is the self-assessment capability model that has 5
levels. Each level is categorized by a
number of people, process, and technology attributes. The exercise is to find the best match of
category to your organizations current capabilities in administering sales
compensation. As a note of caution it’s
better to not round up. If you find
yourself thinking that you are somewhere in between two scores, err on the side
of conservatism and go with the lower score.
When determining which level of maturity think locally and then
globally. You may find a country or
business unit that is farther along with best practices and you can leverage
that across the organization.
Level |
Indicators |
Level 1: Lacking Capability
|
|
Level 2: Limited
Capability
|
|
Level 3: On-Par
|
|
Level 4: Measured and
Automated
|
|
Level 5: Best in
Class
|
|
So what does it mean?
Level 1 -2: If you scored your organization as a level 1
or 2, you have a significant problem such as a completely broken process or a
gap in the technology profile that isn’t allowing you to adequately serve the
needs of the business. The organization is at risk and faces material
financial exposure. Any organization
that self identifies as level 1 or 2 could benefit from outside consulting to
help build the future state capabilities framework and prioritize next steps
for improvement.
Level 3: A score
of 3 puts your organization in line with the market. This is the average and commonly seen from
organization to organization. Realize
that being on-par isn’t necessarily a good thing as shown by market
research. On-par companies fail in any
number of ways – accuracy, timeliness and communication.
Level 4: A score of 4 puts you well down the right
track but still includes some elements of risk.
Time and investment has been made around compensation administration and
you should be reaping some of the benefits.
The key question as a level 4
organization who is out performing their peers is the cost to benefit ratio of
going from a 4 to 5. The usually
depends on the size of the sales organization, the total amount of compensation
paid, competitiveness of your industry, the frequency of change, and / or the level of regulation in your
current industry.
Level 5: If you scored your organization a 5,
congratulations! A 5 puts you firmly in
the top 2% companies in the administration of compensation. Your risk level is low and are from a capabilities
perspective you are delivering tremendous value to the organization and
optimizing your return on investment of compensation dollars.
Capability is a living thing and compensation is in the middle
of a lot of organization change. Review
the scoring model on a periodic basis and re-assess where you are. Without focus, over time scores will drift
downwards;
One question that is often asked when looking at incentive
management improvement is around data.
It’s obviously mission critical.
You can have the best process and technology in the world but if the
upstream data is of poor quality – inaccurate, incomplete, untimely, or
difficult to get to then you will have less than desirable results. Data quality to support compensation is
another enterprise level issue that cannot be ignored. The process is generally the foundation for
success and along with the compensation plan and reporting requirements drive
the data requirements. To holistically
about where data and process fit into the overall compensation management
program, think about it in this order - understand the data, design the plans,
determine the desired reporting, build the administration process, utilize
enabling technologies, and clean up the data, rinse and repeat as necessary.
What
Benefits should we expect?
A fair amount of research has been done around the usage of
the sales performance management technology (Level 4 & 5) and how it will
benefit companies who have made the investment.
Peter Ostrow at
Aberdeen Research summarized the benefits as “companies adopting sales
performance technologies outperform those that don’t—higher attainment of
quota, more reps making quota, higher win rates, increased revenue.”7
Michael Dunne at Gartner Research found that “Organizations
adopting SPM technologies reduce errors by more than 90 percent, reduce
processing times by more than 40 percent and reduce IT/admin staffing by more
than 50 percent.”8
Organizations are all looking to drive top line revenue and
higher margins. Enhancing your
capability to administer sales compensation is one way to do so by things such
as:
·
Providing reporting and analytics around sales
performance for all levels of the organization.
·
Transparency and visibility to the reps for
their pay
·
Giving the sales force back selling time
·
Reducing the number of errors and total
over-payment amounts
·
Increase Management Visibility into sales force
and channel performance
·
Lowering your regulatory risk
And ultimately – Prove the ability to optimize your sales
compensation spend and derive the greatest return on compensation dollars
possible.
Justin can be reached at jlane98@yahoo.com
Please follow Justin on Twitter @spmconsulting
Links to Articles Mentioned
1.
Motivating Salespeople: What Really Works http://hbr.org/2012/07/motivating-salespeople-what-really-works/ar/1
5.
Gundy P. and Gaea E., “Sales Compensation
Governance: The Last Frontier of Corporate Reform,” Benefits Quarterly. http://www.ncbi.nlm.nih.gov/pubmed/15015424
6.
Joe Galvin, Sales ICM Systems: Ready for Prime
Time, Gartner Research. https://www.gartner.com/doc/348357/sales-icm-systems-ready-prime
7.
Aberdeen, Sales Performance Management: Getting
Everyone on the Same Page, Peter Ostrow, August 31, 2010.
8.
Gartner, Marketscope for Sales Incentive
Compensation Management Software, Michael Dunne, March 5, 2010.
