OVERCOMING THE CFO s BLIND SPOT COMPENSATION PLANNING Introduction A recent study by Bain & Company, 1 which analysed the income statements of roughly 200 large USbased companies in healthcare, technology and financial services over an eight year period ending in 2011, identified that more than half of the sample had increasing sales and marketing expenses as a percentage of revenues over the period, or failed to demonstrate the scale benefits to be expected from their growing size. There are many potential explanations for this but one that frequently rises to the top of the pile is the increasing complexity of enterprise sales models and the inability of businesses to exercise effective oversight and control of sales commissions. It s a view supported by another study 2 which indicates companies are pressured by the increasing complexity of compensation plans, affecting 63 percent of the best performing businesses. But for CFOs the opaqueness of the sales compensation plan represents formidable challenges, exposing them to the risk that forecast compensation plans are inaccurate and raising doubts that they are failing to achieve strategic alignment between sales incentives and corporate objectives. And with sales commissions being the number one driver of sales force behaviour there are broader concerns that a poorly crafted compensation plan could encourage excessive risk taking. For many finance leaders compensation planning has become an unwelcome blind-spot. So how does the CFO regain visibility of the sales compensation process and ensure that compensation planning does not leave the organization susceptible to spiralling selling costs and reputational risk? FSN Executive Briefing
What is driving complexity? In broad terms there are several factors driving sales complexity and therefore the intricacy of compensation planning. For example, the current pre-occupation with customer-centricity has encouraged the development of individually tailored services and products, magnifying the number of solution permutations, pricing, and promotions in circulation. And because customers are increasingly in the driving seat, negotiations have themselves assumed a greater level of sophistication, involving more functions and stakeholders with whom the credit for a sale (and the attendant commission) must potentially be shared. Furthermore, customers are wary of being locked into a particular supplier relationship. According to Bain 1, these trends have caused companies to re-position what they sell, for example, shifting from single-product solutions to multi-product portfolios and increasing the value proposition by bundling services, often involving multi-disciplinary teams. The transition from product selling to a more consultative approach makes it more difficult to pinpoint where commissions are due and where to avoid overlapping payments. Diverging markets, geographic spread, and the mushrooming of digital channels have added to the picture of complexity. Within this, multinationals are frequently overlaid with matrix d management structures for global accounts, regional segments, product groups, and indirect sales. So it is not only the breadth of new deals that is driving commission complexity but the potential number of participants that can claim to have a direct stake in closing the sale. Add to this the number of possible indirect participants (more remote management layers) that are also rewarded with a share of new business wins as a matter of course. All in all, it is easy to see how compensation plans can quickly become bound up in impenetrable and unwieldy revenue sharing rules. Unravelling the complexity has not been easy According to McKinsey, 3 companies fear experimenting with the sales force because it is the engine that drives revenue. No matter how patched up or spluttering that engine may be, the thought of overhauling it fills senior executives with dread. To keep sales flowing, companies will make piecemeal ongoing repairs as long as they can. 3 Clearly, meddling with sales compensation planning is a sensitive issue; it s the elephant in the room and as a result a lot of effort has been expended in tightening and standardising other aspects of the sales process without getting to the root of commission calculations issues. For example, many businesses have invested in CRM, sales quota and territory management, product configuration optimization, and HR related improvements focused on better sales hiring processes and reducing sales team turnover. A significant issue is the lack of integration between these discrete application areas; further, the compensation process is frequently punctuated by spreadsheets. A recent benchmark survey 4 by Ventana Research identifies that 26 percent of participants identified inadequate software as the largest barrier to effective workforce planning. More than one-quarter of organizations use only spreadsheets for tracking and managing compensation, and 35 percent use them extensively in conjunction with their compensation systems. Yet static spreadsheets are limited in the level of detail they can provide the sales force to illustrate how and why they were paid. 2
More than one-quarter of organizations use only spreadsheets for tracking and managing compensation 38% found errors in payments to employees in the past 18 months Over-reliance on spreadsheets increases financial risk The extensive use of spreadsheets within compensation planning heightens the possibility of error and financial risk as well as acting as a barrier to productivity. In fact, 38 percent of participants in Ventana s research 4 said they had found errors in payments to employees in the past 18 months. But there are other risks as well, most notably the reputational risk that can surface when compensation planning is not well integrated and the commission system does not encourage the right behaviours. For example, the U.S. government is suing the Bank of America for $1 billion over misselling of Countrywide mortgages known as Hustle loans. 5 It is alleged that Countrywide Financial - owned by Bank of America - sold mortgages without adequately checking if borrowers could pay. At one point 57 percent of the loans had defaulted. Loan processors were given little guidance the suit said: checklists intended to ensure loans were compliant (for example, assessing whether the income level that a borrower listed was reasonable) were eliminated. As a result, bonuses were based solely on how many loans an employee could process, not the quality 5. So is there a better way of managing sales commission and compensation planning? Aberdeen s Research finds that the best companies have processes in place to ensure that compensation plans are motivating the desired selling behaviour (i.e. in line with corporate objectives) as well as producing more accurate payments and reports. Key to the success of this approach is a centralised compensation model.
A new analytical platform for compensation planning However, a more holistic approach requires a new breed of analytical platform able to cope with the deep granularity, volumes, and complexity associated with compensation planning on a multinational scale. So what are the key technologies required? Leading edge companies are discovering that a more technical approach is required; one that combines adaptable modelling capabilities with powerful inmemory processing to give companies the ability to react to change and recalculate compensation plans from the ground up in seconds. For example, McAfee used Anaplan, a business planning and execution platform to replace a uniquely complex sales quota and remuneration process involving a plethora of disconnected Microsoft Excel spreadsheets and up to 40 different Microsoft Access databases. The calculations were spread across 25+ finance and operations personnel based in different geographies around the world and it was difficult to consolidate, review, and approve commission related data in a timely fashion. But with a powerful analytical engine behind them, and a single data model deployed in the cloud, key stakeholders in the process, such as the CFO and other stakeholders have clear visibility of the process for the first time. Summary Intricate and convoluted business models coupled with the current mantra for customer-centricity is driving complexity in compensation planning models. In many cases companies have shied away from tackling the problem head-on, preferring to repair other aspects of the sales process which are less sensitive and less likely to disrupt sales performance. But as a result, sales costs are rising disproportionately to revenues. In addition, an over-reliance on spreadsheets and a variety of unintegrated solutions is contributing to a CFO blind spot, exposing finance leaders to unacceptable levels of financial and reputational risk. Compensation planning is a highly complex and idiosyncratic area characterised by high volumes, the need for high levels of business user participation and specialised requirements. It requires flexible model building supported by in-memory capability that is capable of re-computing high volume, multi-dimensional models on-demand. New generation technologies which are adaptable, accessible and scalable, and which allow large data sets to be recalculated on the fly, allow CFOs to overcome the compensation planning blind spot, giving them visibility into forecast commission earnings and the confidence that sales force behaviour is in line with corporate objectives.
About the Author Gary Simon is Group Publisher of FSN Publishing Limited and Managing Editor of FSN Newswire. He is a graduate of London University, a Fellow of the Institute of Chartered Accountants in England and Wales and a Fellow of the British Computer Society with more than 27 years experience of implementing management and financial reporting systems. He is the author of four books, many product reviews and whitepapers and as a leading authority on the financial systems market is a popular and independent speaker on market developments. Formerly a partner in Deloitte for more than 16 years, he has led some of the most complex information management assignments for global enterprises in the private and public sector. Bibliography 1 Bain & Company 2013 Is complexity killing your sales model? Dianne Ledingham, Mark Kovac, Michael Heric and Francois Montaville 2 Aberdeen Group, 2007 Sales Compensation Management: Coin-Operated Productivity 3 McKinsey 2009, Cutting sales costs not revenues Anupam Agarwal, Eric Harmon and Michael Viertler 4 Ventana Research, 2012 Trends in Total Compensation Management 4 Mail Online 24 October 2012 U.S. government sues Bank of America for $1BILLION over mis-selling of Countrywide mortgages known as Hustle loans Disclaimer of Warranty/Limit of Liability Whilst every attempt has been made to ensure that the information in this document is accurate and complete some typographical errors or technical inaccuracies may exist. This report is of a general nature and not intended to be specific to a particular set of circumstances. The publisher and author make no representations or warranties with respect to the accuracy or completeness of the contents of this white paper and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives, or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. FSN Publishing Limited and the author shall not be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. FSN Publishing Limited 2014. All rights reserved. 2014 Anaplan. All rights reserved. linkedin.com/company/anaplan twitter.com/anaplan facebook.com/anaplan plus.google.com/+anaplaninc