Managing Sales Incentive Compensation Amid Uncertainty

Transcription

1 Managing Sales Incentive Compensation Amid Uncertainty A report prepared by CFO Research Services in collaboration with Varicent Software Incorporated

2 Managing Sales Incentive Compensation Amid Uncertainty A report prepared by CFO Research Services in collaboration with Varicent Software Incorporated

3 Contents Companies take a broader view of 2 pay-for-performance on the path to profitability About this report 2 Pressure to maintain profitability lingers 4 as economic recovery begins to take hold Tension emerges between encouraging 5 sophisticated sales behavior and promoting control, visibility, and ease of administration Finance function s analytical skill 7 combined with specialized technology helps to resolve the tension between competing forces Finance executives recognize the value of 9 technology in managing sales incentive compensation Helping the sales function sell: 10 collaborative approach is key to finance s support of sales efforts Managing Sales Incentive Compensation Amid Uncertainty In their own words: senior finance 12 executives offer advice to their peers Sponsor s perspective cfo publishing llc March

4 Managing Sales Incentive Compensation Amid Uncertainty Companies take a broader view of pay-for-performance on the path to profitability How much has the world changed since March 2007, when CFO Research Services published its last report on sales incentive compensation management?* The global financial system nearly collapsed; demand for goods and services plummeted; the U.S. and European economies weathered a severe recession; business growth around the world slowed substantially. Companies that had been eagerly engaged in pursuing growth plans at home and abroad were forced to turn their attention to finance fundamentals: funding their companies, managing cash and working capital, and controlling costs to maintain profitability. In a buyer s market for goods and services, heated competition for customers grew even more intense. The most desirable customers, confident in their ability to drive hard bargains and increasingly willing to swap one supplier for another to protect their own bottom lines, demanded price concessions and better service on every order and engagement. But although the business environment has changed a great deal in the past two years, the challenges that companies face as the recovery begins to unfold differ more in degree than in type: companies are striving to excel amid intense competition, growth pressure, and close attention to the bottom line. We found in our last research program on sales incentive compensation that companies in many markets were already assembling complex offerings integrated sets of products and services in an effort to respond to this combined set of challenges. When they work well, these integrated offerings deliver value to customers while making the most of sales efforts. About this report In January 2010, CFO Research Services (a unit of CFO Publishing LLC) conducted a survey among senior finance executives at large companies in the United States to examine their views on sales incentive compensation management. We gathered a total of 157 complete survey responses from CFOs and other senior finance executives. Respondents work for companies in a broad range of company segments: Annual revenue $500 million to $1 billion 34% $1 billion to $5 billion 34% $5 billion to $10 billion 12% More than $10 billion 20% Titles Chief financial officer 25% VP of finance 23% Director of finance 19% Controller 19% EVP or SVP of finance 5% Treasurer 1% CEO, president, or managing director 1% Other 8% Respondents work for companies in nearly every industry. The financial services, manufacturing, and wholesale/ retail trade sectors are particularly well represented. Note: Percentages may not total 100%, due to rounding. Faced with a gradual recovery and uncertain business prospects, companies are under pressure to deliver the combined product and service offerings that customers expect, while keeping sales and other costs as low (and as predictable) as possible. Selling such offerings with an eye toward margin requires close collaboration among many business constituents, including sales, sales support, and operating business lines. In this environment, companies are likely to approach pay-for-performance the cornerstone of sales incentive compensation management more broadly and to define performance itself more broadly, to include service, collaboration, and progress toward larger company goals not just closing deals. Companies are under pressure to deliver combined product and service offerings, while keeping sales costs as low (and predictable) as possible. *Promoting Growth Through Incentive Compensation Management: Technology tools increase visibility and control (CFO Research Services, March 2007) 2 March cfo publishing llc

5 Not surprisingly, efforts to motivate behavior in a complex, competitive business environment lead to complicated sales compensation plans. The executives we spoke with in the 2007 study note that complicated compensation plans often seek to direct sales behavior to support key business initiatives, such as new market penetration, customer service, teamwork, and especially critical in the current business climate profitability. Group sales efforts, multi-part sales offerings, and multi-business-unit participation on single deals also contribute to complexity. Many of these complex sales incentive compensation plans have met with success, but some executives voice concern, noting that even well-intentioned plans can sometimes lead to unexpected outcomes. These unexpected outcomes for example, higher-thanexpected commissions paid on unusually large deals disrupt companies efforts to optimize the relationship between the cost of sales, the revenue realized through those sales efforts, and, ultimately, company profitability. Even if compensation plans motivate the right behavior and lead to an increase in the right kinds of sales, companies can still miss profit targets if the cost of improving sales offsets the realized gains. The stakes for striking the right balance among the cost of sales, revenue growth, and profitability are high indeed. As the economic recovery begins to unfold, finance executives predict that sales improvements will play a key role in their companies growth strategies, alongside new product and service development and marketing efforts. But many sales functions are working to make their contribution even as they recover from serious disruption: the results of our 2010 survey of finance executives on sales incentive compensation management show that companies made substantial changes to their sales functions during the course of the economic downturn, as they struggled to respond to subdued demand for goods and services. Among the many sales improvements that companies could pursue, survey respondents say that the greatest value would flow from improving their companies ability to encourage highly sophisticated sales behavior such as selling bundled offerings, cross-selling, or team selling. At the same time, survey results suggest that finance executives aspire to help their companies develop sales incentive compensation plans that are as simple as possible, in order to keep the cost of administration and the risk of error to a minimum. These results suggest that at least two sets of interests and objectives are likely held in tension at many companies: on the one hand, companies aspire to encourage highly sophisticated sales behavior through their sales incentive compensation plans. On the other hand, both companies and sales staff benefit when plans are as simple and clear as they can be. The more simple the plan, the easier it is to administer, to understand and communicate, and to adapt to changing circumstances. Complex sales incentive compensation plans often meet with success, but they can sometimes lead to unexpected and costly outcomes. Survey results also suggest, however, that technology can help companies resolve the tension between the desire to encourage sophisticated sales behavior, on the one hand, and administrative challenges, on the other. As we learned in Promoting Growth Through Incentive Compensation Management, technology systems dedicated to managing sales incentive compensation (and, more broadly, sales performance) help companies address complexity, accommodate business growth and change, improve reliability, and optimize performance while avoiding unexpected outcomes. The results of our survey confirm that finance executives recognize the value of moving away from spreadsheets toward technology systems that are focused on the unique problem of managing sales incentive compensation and, more broadly, sales performance. As companies prepare to take on a highly competitive and deeply uncertain sales environment, this research suggests that dedicated technology systems can help companies design and administer the complex compensation plans that incent sales staff to behave in the ways that companies deem essential to their own competitive advantage without sacrificing clarity, flexibility, or control. Technology helps to resolve the tension between the need to use more complex compensation plans and the challenge of administering them cfo publishing llc March

6 Managing Sales Incentive Compensation Amid Uncertainty Pressure to maintain profitability lingers as economic recovery begins to take hold The sheer magnitude of the recession already informally known as the Great Recession has invited many media and business observers to imagine the new normal that might emerge with economic recovery. Will individual thrift and public restraint lead to dimmer prospects for economic growth and continued emphasis on profitability among U.S. companies? Although the contours of the new normal are still coming into view, the results of our survey show that an emphasis on profitability, which served many companies well in the downturn, will probably linger into the recovery. Two-thirds of all respondents (67%) say they expect their companies to focus more on profitability in the coming recovery than they did during the last period of economic expansion (38% of respondents say their companies are likely to focus somewhat more on profitability, and another 29% say their companies will likely focus much more on profitability). (See Figure 1.) Very few respondents only 6% are willing to say their companies will focus less on profitability in this recovery, compared with the last expansion. This emphasis on profitability suggests that many companies will seek not just to sell business, but to sell profitable business and to do so for a known, rational, predictable cost. As the pressure to optimize the relationship between the cost of sales, revenue growth, and profitability rises, finance executives anticipate a balanced approach to growth, with improvements in sales methods, processes, and staffing (21%) taking their place alongside new customer acquisition (28%) and new product and service development (26%) as primary contributors to growth. But what form will these sales improvements take? What sales improvements would contribute most? Survey results show that finance executives recognize the value of encouraging more sophisticated sales behavior, in particular, as companies pursue their goals. An emphasis on profitability, which served companies so well through the downturn, will probably linger into the recovery. Figure 1. Companies focus on profitability will remain intact as they prepare for recovery, say finance executives. Please complete the following statement with the phrase that best describes your opinion: Following the recent economic downturn, my company is likely to focus on profitability (as opposed to revenue growth) in the coming Much more 29% Somewhat more 38% Somewhat less 6% Much less 0% None of these--my company is unlikely to change its focus on profitability 27% Not sure 0% 0% 20% 40% 4 March cfo publishing llc

7 Tension emerges between encouraging sophisticated sales behavior and promoting control, visibility, and ease of administration We presented survey respondents with an array of sales management improvements, and asked them to tell us which would be most likely to help their companies meet their business objectives over the next two years. Survey results show that respondents, in general, believe the greatest value would flow from more sophisticated selling behaviors such as selling to meet profitability targets, team selling, and cross-selling. Sixty-one percent of respondents cite more sophisticated selling behaviors among the sales management improvements most likely to help their companies reach their goals. (See Figure 2.) Improved collaboration across the enterprise (38%) and other sales improvements follow distantly. While finance executives seem to agree on the value of more sophisticated selling methods, survey results show that they often see room for improvement in their companies ability to encourage sales staff to pursue them. (See Figure 3.) A majority of respondents (59%) say they see room for improvement in their companies ability to encourage sophisticated sales behavior; the same number of respondents identifies room for improvement in their companies use of tools and analytics to improve sales performance. Indeed, the finance executives who responded to our survey tend to see room for improvement in high-value, performance-enhancing sales management activities. Survey respondents are much less likely, however, to see room for improvement in more mechanical, administrative activities such as paying sales commissions accurately and on time. But survey results suggesting that many companies are performing relatively well at sales incentive compensation management belie the anxiety that many respondents express concerning the growing complexity of sales incentive compensation plans. Although respondents recognize the value of sophisticated sales methods and encouraging Figure 2. In order to meet business objectives, finance executives perceive the greatest value in increasing the sophistication of selling behaviors. In your opinion, which of the following sales management improvements would be most likely to help your company reach its goals over the next two years? More sophisticated selling behaviors 61% Improved collaboration among sales staff and other business constituents Better reporting of sales information for forecasting and business decision making 38% 37% Improved sales efficiency 35% Increased use of modeling and analytics for sales performance management 30% Improved collaboration among sales staff (e.g., lead sharing, account development) 26% More responsive/flexible sales behavior 19% Increased sales head count 10% Other 1% 0% 10% 20% 30% 40% 50% 60% 70% Note: Respondents were asked to select up to three choices cfo publishing llc March

8 Managing Sales Incentive Compensation Amid Uncertainty Figure 3. Finance executives are most likely to see room for improvement in their companies ability to encourage sophisticated sales behavior the very improvement that they say would yield the greatest benefit. In your opinion, how well is your company performing at the following sales management activities? Encouraging sophisticated sales behavior (e.g., selling highly profitable business, cross-selling) Using tools and analytics to improve sales performance Gathering and using information on sales activity for planning, budgeting, and forecasting Maximizing selling time for sales staff Identifying and retaining talented sales staff Minimizing channel conflicts with third-party sales/marketing channels Communicating incentive compensation plan(s) to sales staff Reducing sales commission disputes Paying sales commissions on time Making accurate sales commission payments 14% 11% 10% 25% 24% 34% 0% 20% 40% 60% 80% 100% Room for improvement Adequate performance Excellent performance Don't know/does not apply Note: Percentages may not total 100%, due to rounding. Figure 4. Survey results suggest that companies are working to craft incentive compensation plans that incent complex sales behaviors but are also simple enough to communicate, control, and administer effectively. p 43% 50% 59% 59% 40% 48% 50% 43% 49% 52% 39% p 27% 39% 36% 14% 26% 31% 8% 17% 8% 8% 5% 5% 8% 24% 21% 8% 10% 14% 16% 6% 9% 6% 3% In your opinion, is your company s sales incentive compensation plan likely to become more or less complex over the next two years? Over the next two years, my company s sales incentive compensation plan is likely to become Much more complex 6% Somewhat more complex 31% Somewhat less complex 24% Much less complex Not sure 6% 5% None of these my company s sales incentive compensation plan is unlikely to change 30% 0% 20% 40% 6 March cfo publishing llc

9 salespeople to pursue these methods often demands more complex compensation plans survey results suggest that companies aspire to develop sales incentive compensation plans that are as simple as they can be, while still motivating the desired sales behavior. Many respondents (37%) acknowledge that they expect their sales incentive compensation plans to become at least somewhat more complex over the next two years, but very few respondents (only 6%) are willing to say their companies sales compensation plans are likely to become much more complex. (See Figure 4, page 6.) At the same time, many respondents (30%) say they expect their sales compensation plans to likely become at least somewhat less complex. And in open-text responses to a question asking respondents to offer advice to their peers on how to improve sales incentive compensation management, many respondents urged their peers to simplify sales compensation plans to the extent possible. The challenge in incentive compensation plan design is to construct plans that strike the right balance between encouraging complex sales behaviors and minimizing administrative difficulties and risks. Taken together, these survey results reveal at least two sets of interests and objectives that are probably in tension at many companies: on the one hand, companies wish to encourage highly sophisticated sales behaviors through their sales incentive compensation plans. On the other hand, companies and their sales staff benefit when plans are as simple as possible; a relatively simple plan is easier to administer, to understand and communicate, and to adapt to changing circumstances than a byzantine plan. The challenge in incentive compensation plan design, then, is to construct plans that will strike the right balance between encouraging complex sales behaviors through complicated provisions and minimizing administrative difficulties and risks. Survey results indicate that finance executives recognize that they have something important to offer in striking the right balance between these two major interests. And the results of our survey show that finance executives see a key role for technology in helping companies implement the types of compensation plans that will motivate the desired sales behaviors while promoting ease of administration. Finance function s analytical skill combined with specialized technology helps to resolve the tension between competing forces The results of our survey show that finance is more likely to play a role in sales incentive compensation plan administration than in plan design at least for now. Only 13% of respondents say that the finance function currently plays a leading role in designing their companies sales incentive compensation plans (compared with 44% of respondents who confirm that sales operations take a leading role in plan design); many more respondents (37%), however, say that finance takes a leading role in plan administration at their companies. Survey results also suggest, however, that finance s role in sales incentive compensation management may be gradually shifting toward greater involvement in compensation plan design. A majority of respondents (52%) confirm that finance will play more of a role in managing sales incentive compensation including plan design as well as administration over the next two years. (See Figure 5.) Figure 5. Finance s role in sales compensation management will likely expand over the next two years. In your opinion, is the finance function at your company likely to play more of a role in sales incentive compensation management (including plan design and administration) over the next two years? Yes 52% No 48% 2010 cfo publishing llc March

10 Managing Sales Incentive Compensation Amid Uncertainty Figure 6. Analytical prowess, more than administrative skill, supports the broader mandate for finance s greater involvement in sales incentive compensation management. In your opinion, how compelling are the following reasons for the finance function to become more involved with sales incentive compensation management? Analytic capabilities: Finance is the right organization to improve sales decision making and ensure that the company strikes the right balance between increasing revenue and maintaining profitability Reporting ability: Finance is the right organization to ensure that relevant sales information is reported and put to good use across the organization Compliance requirements: Finance is the right organization to ensure that all variable compensation payments meet applicable regulations Administrative skill: Finance is the right organization to assure timely, accurate sales compensation payments and minimize disputes Why this shift toward greater finance involvement in sales incentive compensation management? Finance executives are especially likely to cite finance s analytical skills its ability to improve sales decision making and ensure that the company strikes the right balance between increasing revenue and maintaining profitability as a very compelling reason for finance to become more involved (64%). Respondents are much less likely, however, to point to finance s administrative skills its ability to assure timely, accurate sales compensation payments and to minimize disputes as a very compelling reason for greater finance involvement. (See Figure 6.) Survey respondents identify finance s analytical skill as a particularly compelling reason for finance to become more involved with sales incentive compensation management. 40% 38% 47% 64% 34% 40% 45% 30% 24% 20% 0% 20% 40% 60% 80% 100% Very compelling reason Somewhat compelling reason Not a compelling reason Not sure Note: Percentages may not total 100%, due to rounding. Finance executives own emphasis on analytical ability as opposed to administrative skill suggests that the role they see for themselves in sales incentive compensation management is closely related to the need they recognize: the need to develop sales incentive compensation plans that will motivate the most sophisticated, complex and ultimately profitable sales behaviors. While survey respondents seem to recognize that finance is well placed and well equipped to make a positive contribution to plan design, they also seem to recognize that technology systems focused on sales incentive compensation management have a positive contribution to make in easing implementation and administration, reducing risk, and improving flexibility. As business imperatives draw companies toward more complex sales incentive compensation plans, finance executives seem to view technology as a tool that can help them manage that complexity. 5% 7% 2% 1% 2% 3% 8 March cfo publishing llc

11 Finance executives recognize the value of technology in managing sales incentive compensation According to survey results, most companies (54%) still use a combination of spreadsheets, , and manual processes to manage sales incentive compensation. (See Figure 7.) Some companies, however, have adopted technology focused on managing sales incentive compensation in some cases, a module of an existing financial application (19%), and in others, a custom-built (13%) or packaged application (5%) dedicated to incentive compensation management. We asked respondents to tell us whether their companies technology capabilities have helped them to manage sales incentive compensation effectively and we found that respondents whose companies have adopted technology Figure 7. Survey results suggest that most companies use spreadsheets and manual processes to manage sales compensation plans. To the best of your knowledge, which of the following best describes the system your company primarily uses for managing sales incentive compensation? Spreadsheets, , and manual processes Financial application module (e.g., module of an ERP system, CRM system, performance management system) Custom-built application dedicated to incentive compensation management Not sure 6% 13% 19% 54% focused on sales incentive compensation management are far more likely than their peers who use spreadsheets and manual processes to say that technology has made a positive contribution to their ability to manage sales incentive compensation well. (See Figure 8.) Three-quarters of respondents who have adopted technology designed for sales incentive compensation management say that technology has made a positive contribution to their efforts; only 28% of those who use spreadsheets say the same. Survey results also show that finance executives are well aware of the benefits that can flow from adopting technology geared specifically toward managing sales performance, because they anticipate a role for technology improvement in improving sales performance as the recovery unfolds. Eighty-three percent of all respondents anticipate that technology will play at least a contributing role in their companies efforts to improve sales performance over the next two Figure 8. Those who have adopted specialized technology systems are much more likely than spreadsheet users to confirm that technology has made a positive contribution to sales incentive compensation management at their companies. To what extent have your company s technology capabilities helped it to manage sales incentive compensation effectively? Substantially contributed to its ability to manage sales incentive compensation Somewhat contributed to its ability to manage sales incentive compensation Had little effect on its ability to manage sales incentive compensation Somewhat detracted from its ability to manage sales incentive compensation 1% 17% 25% 8% 18% 27% 50% 52% 75% of respondents using technology focused on incentive compensation management say it has contributed substantially or somewhat to effective sales incentive compensation management. Only 28% of spreadsheet/ manual process respondents hold such a view. Packaged application dedicated to incentive compensation management Other 5% 5% 0% 20% 40% 60% Substantially detracted from its ability to manage sales incentive compensation 0% 1% 0% 20% 40% 60% Financial application module, custom-built application, packaged application or other Spreadsheets, , and manual processes in each segment 2010 cfo publishing llc March

12 Managing Sales Incentive Compensation Amid Uncertainty Figure 9. Technology improvement will be essential to efforts to meet sales performance objectives in the years to come, say finance executives. In your opinion, how much of a role will technology improvement play in improving sales performance at your company over the next two years? A critical role we won't be able to achieve our goals without technology improvement An important role technology improvement will be central to our sales performance improvement plans A contributing role technology improvement will likely support our sales performance improvement efforts A minimal role we're unlikely to pursue technology improvement connected to sales performance management years: 31% of all respondents say technology will likely play a contributing role in sales performance improvement efforts; 34% say technology improvement will play an important role ; and 18% say technology improvement will play a critical role confirming that their companies won t be able to achieve [their sales performance] goals without technology improvement. (See Figure 9.) As finance executives prepare themselves to take on a more prominent role in managing sales incentive compensation, the results of this survey show that many will look to technology improvements to help them reach their sales performance improvement goals. But survey results also indicate that finance executives will seek organizational change, in addition to technology transformation, as they move down the path to sales performance improvement. 18% 17% 31% 34% 0% 20% 40% Helping the sales function sell: collaborative approach is key to finance s support of sales efforts Finance executives consistently identify resource scarcity as a barrier to improvement efforts; indeed, putting finite resources to good use is one of the defining jobs of management. So it s not surprising that respondents identify resource scarcity as an obstacle to improving sales incentive compensation management at their companies relatively often (28% of respondents cite the lack of time, attention, and resources among the greatest obstacles to improvement). (See Figure 10.) Organizational problems resistance to change and a lack of collaboration are first-order barriers to companies improvement efforts. Somewhat more surprising, however, is the number of respondents who say that organizational resistance among sales staff (29%) and a lack of collaboration among finance, operations management, sales, and/or HR (27%) rank among the greatest obstacles to improving sales incentive compensation management. These results demonstrate that organizational issues resistance to change and a lack of collaboration are barriers of the first order to companies improvement efforts. Sales organizations work at the core of the business; the work of sales staff is directly tied to revenue generation, and salespeople are among the most highly compensated individuals at any company and they take on substantial personal risk as they pursue their companies work. This combination of 10 March cfo publishing llc

13 Figure 10. Organizational resistance from powerful sales organizations represents a major barrier to improvement. In your opinion, which of the following are the greatest obstacles to improving sales incentive compensation management at your company? Organizational resistance among sales staff 29% Lack of time, attention, and resources Lack of collaboration among finance, operations management, sales, and/or HR Lack of a standardized approach to sales incentive compensation management across the company Inadequate technology systems Highly complex incentive compensation plans Lack of tools, frameworks, and decision-making structures for sales incentive compensation plan design No clear sense of the business benefits 22% 22% 21% 20% 19% 27% 28% Lack of visibility into sales incentive compensation plan performance Other 10% 16% 0% 10% 20% 30% Note: Respondents were asked to select up to three choices. factors contributes to sales functions prestige and political influence within their organizations; resistance to change flowing from the sales function represents a substantial obstacle indeed. At the same time, the very traits that can confer great advantage when selling into competitive markets independence, goal-orientation, and self-motivation can make it more challenging to gain sales function support for cross-functional efforts to improve sales performance. Survey results suggest that many organizations are working to find the most effective ways to support sales efforts, while allowing highly skilled sales staff to do what they do best. Opening formal and informal lines of communication among interested business constituents; asking questions and learning more about sales methods, priorities, and challenges; and supplying financial and analytical expertise to rationalize sales incentives with business objectives these and other efforts to improve collaboration would likely be richly rewarded as finance executives consider whether and how to contribute to their companies sales performance improvement efforts. For a sales force whose efforts are directed toward desirable behavior through a well-crafted compensation plan and that has confidence in the administration of that plan is a formidable competitive weapon in a challenging and uncertain recovery. Efforts such as opening lines of communication, learning more about sales, and contributing analytical expertise are likely to be well rewarded in the months ahead cfo publishing llc March

14 Managing Sales Incentive Compensation Amid Uncertainty In their own words: senior finance executives offer advice to their peers Survey results reveal that finance executives see a more prominent role for themselves in sales incentive compensation management including compensation plan design. This research also shows that finance executives recognize the value of technology designed specifically to manage sales performance. We invited survey respondents to offer, in their own words, advice to their peers on improving sales incentive compensation management, based on their own experiences and observations. Here s what they had to say: Incent desirable sales behaviors by setting the right targets... Define multiple metrics that are key to overall company performance, and tie each metric to a portion of the comp[ensation] plan. What gets incented gets done! Comp[ensation] plans based solely on [targets tied to the] top line are dangerous. They should be bottom-line focused. Incentive compensation should be based on a few factors, the first being revenue production. Revenues should then be coupled with the long-term value added to the company and adjusted by short- to mid-term risk factors [in the form of] deferrals. Tie incentives to contribution, not just dollars and volume also take into account collections and performance. but avoid needless complexity. Simple, clear plans are easy to track. When plans become too complex and are cumbersome to track, you spend a significant amount of time discussing and performing unnecessary analysis on incentive payments. This does not add to a motivated sales staff. Keep it simple, so the sales team can easily understand how decisions will be reflected in their compensation. This is the best way to drive desired behavior. Fairness and transparency will be rewarded. Make sure that the plan is thoroughly understood by everyone and is applied fairly to all parties. Comp[ensation] should also be fair in relation to those who support revenue production. Take care to link measurable behaviors to the desired targets. Use technology to simplify plan administration and enhance visibility and control. Try to simplify and standardize the plans where possible. Look for automation to assist in streamlining processes. Automate all processes and reports. Do not permit any spreadsheets. If spreadsheets are allowed, then you cannot control consistency and accuracy. Invest in automation early. As organizations grow and portfolios expand, sales compensation only gets more complex. Lack of investment in infrastructure can become a limitation in the marketplace. Recognize the complexity of the task at hand; seek advice from experts. Make sure to focus on what truly drives increased sales. Sometimes we don t understand what really drives results for our company or our competitors. Use experts and expert tools to manage the plans. Read the books on sales compensation [plan] design and then hire a consultant. There is far more to it than you might realize, and it is essential that certain issues are addressed first. Get involved in plan design Finance should take a lead role in developing metrics and processes. work to promote cross-functional collaboration Get collaboration across groups, especially between finance and sales operations. By sharing more information up front with the sales force, we have been better able to implement changes. Open communication with the sales team and other parts of the organization seems to be key to a successful plan. and seek top-level executive sponsorship to help guide and manage change. [You ll] need a CEO or president well versed in the goals and objectives of incentive plans. It starts with a commitment to design plans that drive desired behaviors and a willingness to venture into creative methods of accomplishing this objective. If senior management will not get behind a [sales compensation] redesign, it is doomed to fail, particularly where entrenched attitudes about how salespeople are compensated permeate the current structure. 12 March cfo publishing llc

15 Getting finance involved with sales compensation At Varicent, we observed two key trends in the area of incentive compensation emerging over the past year. First, as organizations continue to drive their businesses forward, their focus is on profitable growth. And aligning incentive compensation practices with profit and margin improvement goals is a new imperative in the corporate arena, and particularly for finance institutions. We believe that finance must take a leadership role in helping to drive this change and filter its impact throughout the organization. Our second observation was that organizations want to change their compensation plans to encourage cross-selling and up-selling, which requires a more sophisticated strategy than simply measuring revenue. Many organizations do not have the data, processes, and technology required to implement the desired change. Again, we believe that this is an area where finance can become a key contributor. We are pleased to facilitate this research, which helps to quantify the aforementioned observations and provides additional insight along these lines. The survey results substantiate our observations and reveal that finance is indeed looking to play a more active role in driving sales behavior, compensation, and performance. Finance executives have visibility into the performance metrics relating to profitability, they play a crucial role in determining the organization s financial outlook, and they are the ones charged with meeting audit and compliance requirements. Business insight from the finance function will prove to be extremely valuable in sales compensation. Organizations typically embrace a culture that promotes profitability, and relative to compensation plans, this inevitably leads to more complexity. Driving profitability requires more sophisticated selling behaviors, such as pushing highmargin products or bundles, cross-selling, and up-selling. The implications of a more complex incentive program include increased difficulty in modeling plans for budget management, more time spent on tracking payments for both sales and compensation teams rather than on driving value, and a greater demand for reporting and analytics to measure sales and plan effectiveness. Finance departments have a good track record of bringing process enhancement, new technology, and insightful analyses together to drive improvements. With an application like Varicent SPM implementing compensation programs, tracking performance, and automating commission processes, organizations can effectively align the sales force with corporate financial objectives. Compensation analysts are able to build and model complex plans without requiring any IT expertise. Audit trails of all payments, calculations, and adjustments are logged for compliance purposes. Salespeople have access to detailed commission statements to eliminate shadow accounting, freeing them to sell more. In addition, organizations implementing a sales performance management solution also receive a robust single data source that contains all of the information detailing who actually sold what, to whom, at what price net of discounts, returns, and adjustments. This complete data source, when combined with rich analytics, gives organizations the tools they need to effectively make more fact-based decisions and to drive their organizations forward. Sponsor s Perspective For more information, please visit cfo publishing llc March

16 Managing Sales Incentive Compensation amid Uncertainty is published by CFO Publishing LLC, 51 Sleeper Street, Boston, MA Please direct inquiries to Jane Coulter at or Varicent Software Incorporated funded the research and publication of our findings, and we would like to acknowledge Brian Hartlen, Paulson Lan, and Christine Matla for their contributions and support. At CFO Research Services, Celina Rogers directed the research and wrote the report. CFO Research Services is the sponsored research group within CFO Publishing LLC, which produces CFO magazine. March 2010 Copyright 2010 CFO Publishing LLC, which is solely responsible for its content. All rights reserved. No part of this report may be reproduced, stored in a retrieval system, or transmitted in any form, by any means, without written permission.