Incent Perform Grow The ROI of Incentive Compensation Management Making the Business Case
Any organization looking to increase the accuracy, improve the efficiencies, and increase the analytic capabilities of its compensation system may be a candidate for a new incentive compensation management (ICM) system. But how do you make the business case? Without a clearer understanding of the ROI delivered by such solutions, it is difficult for organizations to justify the spend. With thoughtful planning to outline both the associated costs and the expected benefits of a new incentive compensation management system, the business case will be greatly strengthened, thereby increasing the chance that the initiative will receive funding. This document has been written to quantify the ROI of Incentive Compensation Management solutions and to help business leaders to understand the definitive value so that they can embrace ICM technology with confidence, knowing that it will support their corporate goals. It will also take readers through a systematic process of self-assessment so they can identify gaps and opportunities and make a compelling case about anticipated ROI. ROI Survey the ICM Landscape If you are considering a new ICM solution, you probably recognize the limitations of your company s existing system.
As you anticipate the value add of a new solution, you should be very clear regarding the opportunities for growth. Use the checklist below to make note of those areas within your organization that are being impacted by a limited and inflexible ICM infrastructure. Operations, Marketing, and Sales Delays of new product rollouts due to inflexible compensation system. Avoided potentially beneficial compensation structure changes because the current system cannot easily accommodate change. Difficulty getting timely sales incentive analytical data. Sales personnel attrition rate is higher than industry average. Sales personnel and compensation administrators spend a lot of time disputing payment amounts. Payment disputes are difficult to research and resolve. Finance and Accounting Current system often results in overpayments. Commission payments are sometimes late due to the current process. The last audit of the commission process was time consuming and expensive. IT Support Changes to the compensation structure demands considerable support by the IT department. Expensive hardware and software costs.
STEP 1 - Monetize the ICM Cost & Deficiencies Experts estimate that sales personnel spend from 8 to 24 hours per month ensuring that their commission payments are accurate due to a distrust of the commission calculation. This activity is often referred to as Shadow Accounting. The cost of Shadow Accounting can be measured in wasted sales rep salary or in unrealized revenue due to a loss of time spent selling. Shadow Accounting (Sales Rep Salary) hrs = (avg_rep_salary) x (8-24 mo x 12mo) x (no_of_sales_reps) hrs 2000 ~= 5-15% of total_rep_salary yr Shadow Accounting (Unrealized Revenue) hrs (8 = - 24 mo x 12mo) x (total revenue) ~= 5-15% of total_revenue hrs 2000 yr Commision Overpayment Gartner estimates an average 3% - 8% error rate in overpayment related to incentive compensation pay disbursed using manual systems such as spreadsheets. Overpayment cost = overpayment_rate x total_commissions_paid
Plan Administration Costs Aberdeen Group research found that the average company spends $1,500 a year per plan participant to administer these plans. This includes year over year plan changes and the time needed for IT and support resources to make these changes. Administrative Costs = ($1500 - $1900) x no_of_sales_reps Excessive Sales Personnel Turnover HR experts estimate the cost of replacing a sales person at 1.5 times their base salary. Inaccurate or late commission payments from your spreadsheets or legacy commission system can cause frustration and excessive sales personnel attrition. The effect can be calculated by summing excessive turnover costs with the following formula: Excessive Attrition Cost = attrition_rate x no_of_sales_reps x 1.5 x avg_sales_rep_salary Increased Sale Revenue & Gross Margin This metric can sometimes be difficult to calculate, but the real-time information used by Sales Management and Organizational staff drives the development and implementation of plans that are tied to higher gross margin products and services. INSIGHT FROM REAL TIME DATA DEVELOPMENT OF COMPENSATION PLANS SALE OF HIGHER GROSS MARGIN PRODUCTS & SERVICES
The ROI of Incentive Compensation Management Making the Business Case Payment Disputes Inaccurate payments of a spreadsheet-based or legacy SPM system cause payment disputes and the cost can be measured in wasted sales rep salary or unrealized revenue due to loss of selling time. Annual Dispute Cost (Sales Rep Salary) hrs (avg_time_disputing mo x 12mo) x (no_of_sales_reps) = (avg_rep_salary) x 2000 hrs yr Annual Dispute Cost (Lost Revenue) hrs (avg_time_disputing mo x 12mo) = (avg_revenue_per_rep) x x (no_of_sales_reps) hrs 2000 yr Regardless of the size of the organization, the benefits of replacing an inaccurate or inefficient compensation system can indeed be quantified. By taking the first step of conducting an honest evaluation of your company s current state, you will be better prepared to understand the ROI case. Don t Forget to Consider Deployment Options Before you can calculate the ROI, you need to consider the ICM deployment options.
Software as a Service (SaaS) ADVANTAGES DISADVANTAGES Initial deployment time reduced, minimal customer IT support requirements, reduced customer hardware and administration costs (lower capital expenditure), maintenance and upgrades handled by the vendor, predictable cost structure Customization limited to the configurable features of the software, company data resides outside their network and firewall Hosted ADVANTAGES DISADVANTAGES Reduced customer IT support requirements, upgrades controlled by customer, functionality comparable to onpremise solutions Company data outside their network and firewall, generally higher subscription costs or upfront license fees compared to SaaS solutions On-premise ADVANTAGES DISADVANTAGES Greatest flexibility and functionality and data security of available options Highest internal IT support requirements, highest hardware and licensing costs
STEP 2 - Estimate the Total Cost of Ownership (TCO) In order to create a ROI case, the total cost of ownership (TCO) of the new solution needs to be estimated. This is the investment that is to be paid back in savings and revenue increases; that payback period is calculated with the following formula: ROI Payback Time (months) = 12 x (capital_investment) (estimated_annual_savings) + (estimated_annual_incremental_revenue) Estimated costs will include both one time and recurring costs. ONE TIME COSTS RECURRING COSTS Costs incurred in only the first year of the new system s life. Costs incurred every year Hardware (On-premise and some hosting solutions) Software licensing (Onpremise and some hosting solutions) Implementation / activation costs Hardware / Software maintenance fees (On-premise and some hosting solutions) Subscription fees (SaaS and some hosting solutions) Internal IT costs
STEP 3 Calculate the ROI You will want to evaluate the savings or recovery percentage for each cost and revenue recovery opportunity identified in Step 1. Determine a factor to be used before including the figures in your ROI calculation. Compared with spreadsheets or legacy systems, a new ICM system that is well implemented should allow for 50 75% recovery of costs or incremental revenue realization including: Shadow accounting costs Overpayment costs Administrative costs Excessive attrition costs Dispute costs Dispute lost revenue Weighing Soft and Hard cost or incremental revenue items Be more conservative when estimating savings or incremental revenue opportunities if they are based solely on studies or surveys rather than harder data obtained from analysis or audit of your particular process. Create an ROI Spreadsheet Create an ROI spreadsheet to facilitate ROI values and payback period calculation. Don t forget to delay cost savings and revenue recovery realization until the implementation is completed.
Summary Most organizations are beginning to understand that: ICM drives cost reduction ICM improves employee performance ICM aligns business goals and plan effectiveness ICM enhances management insight However, even if an organization has these anticipated benefits in mind, it should always undertake an internal audit of existing challenges and opportunities before investing in an incentive compensation management solution. While ICM offers a wide breadth of benefit to help companies increase performance, lower costs, align business goals with compensation plans and gain meaningful insight, the business case is that much more compelling when it is made with a thoughtful calculation of anticipated ROI. About Iconixx Iconixx is a total solution provider for compensation management. The Iconixx product suite Iconixx Sales, Iconixx Incentive and Iconixx Merit makes the company a one-stop resource for sales, bonus and salary compensation solutions. Our cost-effective, Cloud-based solutions deliver incentives to the entire workforce for businesses of all sizes. Drawing on over 15 years of experience, Iconixx also partners with clients to accelerate their business growth through actionable intelligence. Whether it s using Iconixx technology or leveraging a client s current investment, Iconixx s expertise can drive 3420 Executive Center Drive, STE 250 Austin, TX 78731 877-ICONIXX www.iconixx.com