UNLOCKING THE MYSTERY OF SALES COMPENSATION Three keys to sales compensation success
The promise of sales compensation technology is to provide efficiency, transparency, and clear reporting to the sales force and management. However, our conversations with clients and industry advisors shows that that more than 80% of sales compensation design and automation projects fail to meet their core business objectives. Well-designed compensation plans increase revenue generation, boost profitability, and drive strategic business goals. A wide array of tools exist to automate sales compensation, yet failure often results from allowing factors other than core business objectives to drive the design, cost, and effort of an automation project. These factors may be over-reliance on technology, complex tactical compensation rules, or a broken business process. All factors share a common feature: they all contribute more to overall cost than they deliver in value. The Three Keys Arcadia Solutions, having worked with a variety of clients to address compensation issues, has identified three factors for strategic compensation success that span all industries. These factors are consistently present in organizations that successfully execute their sales compensation strategies. Value Focused Plan Design Compensation plans are often burdened with numerous tactical measures or a multiplicity of rules that do not drive business objectives. Successful companies are able to control plan complexity, resulting in maximum value for each dollar they spend supporting their compensation plans. Efficient Business Process and Workflow Successful organizations ensure that they implement proper business processes surrounding their technology. Not only does this gain maximum leverage from their investment, but also helps align the compensation plan with the realities of the organization. This helps both IT and sales management stay confident that support of their plan is accurate, efficient, and manageable. Effective Reporting and Analytics Reporting and analytics allows successful companies to understand and forecast the effects of compensation strategies on their bottom line, to increase transparency to the sales force, and to trace incentives back to their business value. Providing business intelligence on top of compensation data allows management to adapt to changing business landscapes and evaluate the cost/benefit of proposed changes to compensation plans. Page 1
Value Focused Plan Design Complexity is the primary cost driver in sales compensation projects. Sales compensation is a tool for driving business strategy, and therefore must accurately reflect the goals of the business. It is imperative to all organizations that complexity be mapped back to the value it provides. While complexity is often tied to business value, compensation rules have a high rate of diminishing return and the cost to create and maintain a compensation plan increases geometrically due to the interdependency between rules. Therefore, effective compensation plan design properly balances the value of individual rules against the cost of maintaining them. There are a variety of measures used in compensation plan design, many Figure 1 Cost vs. Complexity for Sales Compensation Projects of which are common across industry verticals. The dollars spent in owning and maintaining a compensation plan should focus on the areas that best deliver on the intended value of the plan. Arcadia has observed two specific examples of tactical plan measures, prior and mid-period plan adjustments, which represent a significant addition of cost and complexity without aiding in the execution and promotion of overall business strategy. Prior Period Adjustments Prior period adjustments (PPAs) involve changes to transactions, plan data, or other items after a period has been closed and paid. They are generally due to errors in keying or processing data. In compensation plans with a high degree of interdependency among rules, a minor change in a previous month can cause major changes in current compensation. In comparison, standard adjustments, which roll all changes into the current period, provide the same business value to an organization: they allow errors to be Figure 2 Comparison of Costs for Prior Period Adjustments Page 2
reconciled and fixed in a timely manner. Standard adjustments, however, have a much shorter implementation timeframe and cost in both technology and business processes. As a result, the net value of a system that supports standard adjustments far exceeds that of a system which supports PPAs. In one example, a client was offered two estimates, one to implement a compensation system that supported prior period adjustments and one that required all adjustments to be rolled into the current payment period. The differences were large: the current period model cost $59k, while the prior period model was estimated to cost $291k, an almost 500% increase! In delivering the system, the business value derived from both proposed solutions was essentially the same. PPAs do not drive business behavior specifically they are a tactical measure taken to mitigate errors made in the commission process. In truth, the actual result of most adjustments is small and not likely to affect overall sales. At another similar client, we found that while over one quarter of transactions sent for payment came from prior periods, 57% of these amounted to less than $100 each. Most remarkably, when examining net commissions impact, the overall change in commission caused by these prior period adjustments was $5,500 on a total expenditure of $9.3m. The results of the prior period adjustments were a rather insignificant 0.06% contribution. Many of these adjustments had no links back to actual sales activity, often involving changes related to parts and inventories months after the deal had been closed. The complexity of these adjustments is difficult for management to justify in the face of other measures that delivered far more business value. Mid Period Changes In another example, a client s sales compensation plan involved not only prior period adjustments, but coupled these with mid-period plan changes. Mid-period plan changes involve changing a salesperson s status or plan in the middle of a pay period. While that may be useful from an administrative standpoint, it does not link directly to any strategic business goal. Similar results can be achieved by making all plan changes effective at the beginning or end of a period. The difference in complexity and cost is readily apparent. In a recent implementation, as shown by Figure 3 to the right, only 64% of the cost for a complex sales compensation project was directed at accomplishing the Figure 3 Implementation Costs for a Sales Compensation Project strategic business goals laid out by the sales management team. The goal of a successful organization should not be to remove all tactical rules that help manage the compensation process, but to make sure that each one is examined carefully and implemented intelligently. Page 3
Efficient Business Process Workflow Regardless of the power or ingenuity of any compensation technology, its value depends on the processes and controls in place around it. Business processes that are exception-driven can drain the productivity of administrative resources, while repeatable business processes can increase both predictability and accuracy. The people employed to manage compensation are the most powerful link to sales compensation success. They are a direct link between the sales force to the compensation plan, and they are uniquely poised to educate the sales force about how compensation plans tie back to strategic business goals. The best compensation teams allocate most of their time and energy towards activities that promote high value business goals and minimize tactical operations that do not drive results. Organizations that successfully leverage their business process and maximize the value of their compensation team have two things in common: a consistent pay cycle, and quality data to support it. Consistent Business Cycle The traditional commissions cycle follows a batch processing model. Compensation teams spend the month processing adjustments, disputes, changes to employee data, and setting up any overrides or exceptions. At the end of the month, the team collects transactions into their platform, runs a batch calculation, and sends the result to payroll. Afterwards, the administration team is left to handle disputes and adjustments until the next month s data is ready to be collected for payment. Figure 4 Distribution of Work Time using a batch processing The batch processing model has some significant drawbacks: methodology The window for data validation is limited. Field managers are typically given a period of a few days to approve compensation for their entire group, so discretionary adjustments are common. Transactions and plan data are not reviewed until late in the pay cycle. This is often too late to correct the data in upstream systems, and the compensation team is forced to maintain separate versions of their data. Over-utilization during critical end-of-month processing means the compensation team lacks adequate time to manage disputes and data changes. This in turn affects other weeks of the pay cycle, as lack of time to focus on basic inquiries before payment leads to a greater rate of disputes, data errors, and corrections in future periods. Page 4
The compensation team spends more time managing data and calculations, and less time servicing the field and analyzing the value of each compensation plan. The alternative to this approach is to spread the tasks of compensation administration across the pay cycle. By processing data as it becomes available, the sales force gains real-time visibility into their compensation and potential issues are identified long before month-end, leading to lower time spent on dispute resolution and increased transparency. With this more predictable and proactive approach, compensation administrators can spend more time on high-value activities such as analyzing data and calculation results, working with sales management to align compensation with business goals and tracking plan effectiveness. Field-Verifiable Data Quality Another factor that lies at the root of many compensation processing issues is the quality of the data used for calculation. Data issues can stem from upstream system quirks, misaligned data maintenance processes, or errors in manual data entry. Low data quality impacts the accuracy of payments, increases the time spent on dispute resolution, and lowers salesperson confidence that their sales compensation is paid fairly and accurately. In a comparative analysis of two clients, the first client dealt with an average of 175 inquiries a month, the largest portion could be linked back to data accuracy issues. Data quality at this client was a known issue. The pressures of poor data quality led to a process where the business manually audited over 90% of transactions each month. This difficult and time-consuming process distracted the compensation team from proactively addressing field issues. This client also implemented several components that were designed to drive business goals, but lacked the data to support them. Comparing that experience with another similarly-sized client where the volume of inquiries was 72% lower than the first, fewer than 5% of transactions were ever audited or adjusted, and the field reported a high degree of confidence in the accuracy and usability of their data. Figure 5 Impact of Improving Data Integrity All the components used to pay the sales force at this client were based on certified data collected through verifiable processes. As a result, compensation administrators who received disputes or inquiries were able to quickly trace payment calculations back to actual business events. Their team was able to spend more time addressing issues before they were reflected in payments and eliminated the chaos of month-end processing. Most importantly, the team spent more of their time on reporting and analysis, increasing the ability to measure plan effectiveness. Page 5
Effective Reporting and Analytics Even with the best information, clear business goals, and a highly efficient execution process, a compensation strategy must be tracked to ensure it meets its objectives. True business transparency can only be achieved through best-in-class reporting and analytics. Reporting and analytics allows management to leverage the productivity gains they experience from effective plan design and streamlined business workflow. Reporting helps management to make informed data-driven decisions that align with overall company goals. One client that was able to integrate this final key to sales compensation effectiveness developed reports in cooperation with their business management. Their sales management, using the reports over several months, was able to see a clear decline in net new sales accounts. This data empowered the business to plan a new sales campaign which would drive sales in new accounts and to track the effect of this sales campaign on an individual territory and rep basis. Further analytics made it possible to measure real return on investment for the sales campaign. The company ultimately saw a 30% increase in revenue and a 10% increase in margin fueled directly by successful reporting and analytics. Figure 6 Value derived from appropriate analytics on verifiable business data The goal of any effort around sales compensation is to align the behavior of the sales force with strategic business goals. By optimizing plan complexity and providing an efficient, transparent business process, companies can ensure that all aspects of sales compensation are focused on achieving business objectives. Coupling this with quality sales data and proper reporting allows companies to derive maximum value from investments in sales compensation. Page 6
About Arcadia Arcadia Solutions is a business & technology consulting firm specializing in Sales Compensation solutions. Arcadia partners with our clients to provide win-win consulting services resulting in improved customer satisfaction, cost savings and revenue increases. If you would like to find out more about the three keys of sales compensation or Arcadia Solutions, please visit our website at www.arcadiasolutions.com. 20 Blanchard Road Suite 10 Burlington, MA 01803 Phone: (781) 202-3600 E-mail: sales@arcadiasolutions.com Page 7
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