Streamlining Sales Compensation from the Inside Out

Many companies that we work with are frustrated with some aspect of sales compensation and are looking for answers on how to stop the pain.  Often they embark on quick fixes that make them feel like they are doing something, but do not treat the underlying issues.  It’s like going to the doctor when you have a headache and upset stomach and want to feel better, and your doctor immediately prescribes some aspirin and antacid medicine.  Immediate relief – perhaps, a cure – maybe – maybe not.

Since your symptoms may be caused by a variety of conditions, your doctor asks questions and runs some diagnostic tests to determine your illness.   Only after the exam, will a diagnosis be determined and a treatment be prescribed.  Had your doctor prescribed medicines to mask the pain prior to the diagnosis, a dangerous condition could have quietly escalated while you popped the Prilosec and Tums.

One of the enlightening aspects of my work as a sales compensation process specialist, is that while many client situations may look alike initially, their root causes are rarely the same.

We employ an “inside out” approach to identifying root causes before prescribing solutions and through  diagnostics, we identify three major types of problems:

Level 1: Simple Processing Errors
These are situations where the business evolved but the business processes, technology and jobs behind them did not. As a result, workers struggle with the system and the field struggles with the results.

Level 2:  External Issues
A good example of an external issue is being dependent on an outside company for a data feed.  You must influence the external organization to give you what you need and when you need it.  Often the people with the influence don’t know what their organization’s need, so a few cycles go by (or many) before the right information is provided and the system stabilizes.

Level 3:  Organizational Issues
Organizational issues come in all flavors but typically involve a lack of two way communication / comprehension.   For example,

- Senior management not understanding the capabilities and resource requirements of the sales compensation team because they assume commission processing is “easy”.
- The compensation function being split across multiple departments having different priorities and personalities that get in the way of getting important work done
- Capacity and skill issues,
- Excessive churn of the compensation plan with little time to implement.

Employing open and objective communication (often from an outsider) helps improve awareness allowing these types of issues to be addressed.

Interestingly, most companies have Level 1, 2 and 3 causes simultaneously so it is very important to flush these issues out up front so that the right projects can be organized and executed.

Like a doctor diagnosing a patient,  an inside out approach can be used up front to properly assess, identify and treat the issues that have taken root.  By doing so, improvement projects will be properly focused and will deliver the measurable results expected by all stakeholders.



Many companies I work with are frustrated with some aspect of sales compensation and are looking for answers on how to stop the pain. Often they embark on quick fixes that make them feel like they are doing something, but do not treat the underlying issues. It’s like going to the doctor when you have a headache and upset stomach and want to feel better and your doctor immediately prescribes some aspirin and antacid medicine. Immediate relief – perhaps, a cure – maybe, maybe not. 

Since your symptoms may be caused by a variety of conditions, your doctor asks questions and runs some diagnostic tests to determine your illness. Only after the exam, will a diagnosis be determined and a treatment be prescribed. Had your doctor prescribed medicines to mask the pain prior to the diagnosis, a dangerous condition could have quietly escalated while you popped the Prilosec and Tums.

One of the enlightening aspects of my work as a sales compensation process specialist, is that while many client situations may look alike initially, their root causes are rarely the same.

We employ an inside out approach to identifying root causes before prescribing solutions and through our diagnostics we identify three major types of problems.

Level 1: Simple Processing Errors
These are situations where the business evolved but the business processes and jobs behind them did not. As a result, workers struggle with the system and the field struggles with the results.

Level 2: External Issues
A good example of an external issue is being dependent on an outside company for a data feed. You must influence the external organization to give you what you need when you need it. Often the people with the influence don’t know what their organization’s need so a few cycles go by (or many) before the right information is provided and the system stabilizes.

Level 3: Organizational Issues
Organizational issues come in all flavors but typically share a lack of two way communication / comprehension. For example,

- Senior management not understanding the capabilities and resource requirements of the sales compensation team because they assume commission processing is “easy”.
- The compensation function being split across multiple departments that have different priorities and personalities.
- Excessive churn of the compensation plan with little time to implement.

Employing open and objective communication (often from an outsider) helps improve awareness allowing these types of issues to be addressed.

Interestingly, most companies have Level 1, 2 and 3 causes simultaneously so it is very important to flush these issues out up front so that right projects can be organized and executed.

To cure compensation frustrations, an inside out approach must be used up front to properly diagnose and treat the issues that have taken root. By doing so, improvement projects will be properly focused and will deliver the measurable results expected by all stakeholders.

www.compensationanalytics.com

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Sales Compensation Graduates to the Cloud

About every 10 years, there is a technology movement that captivates the world and quickly becomes embedded into the fabric of corporate information technology strategies.

In 1998, it was Java programming, with its lure of platform independence – write once, run anywhere.

Early in this century, it was adoption of web services, which would help standardize business transactions and also streamline the exchange of information.  And today, there is no doubt that cloud computing has become the darling of the Enterprise IT landscape.

Many organizations are looking to purchase  cloud based SPM solutions – and there are certainly good reasons to do so.  Monthly subscription service pricing is attractive, upgrades are greatly simplified, new value added offerings come online frequently, and the headaches of the ‘thick client’ on premise Enterprise IT application go away (in theory).  Already, hundreds of companies are using On Demand solutions and many are very satisfied.

How do you know if moving your incentive management and performance reporting to the cloud makes sense for your organization?

Here are some questions to consider when evaluating whether an OnDemand solution is right for your company -

1.  Security
Does your industry have requirements for stringent security requirements (e.g., HIPAA) that exceeds what standard cloud installations can provide?  OnDemand may still be an option however, you may need a specialized installation to beef up the out of the box security.

2.  Transaction Volumes
Does your business have high volumes of data (e.g., telecommunications) or lower volumes of data (e.g., software sales).  For companies with modest amounts of data, leveraging the cloud is straight forward.  However, for companies with gigantic transaction volumes and/or complex plans – the data transfer times and pipeline running times can exceed available processing windows.  There are strategies to deal with the larger volumes (e.g., upload and run more frequently, more powerful boxes etc.) , but careful consideration should be taken before assuming that large and complex businesses can be supported in the cloud.

3.  Existing IT Capabilities
How large and capable is your IT department?  Do you have significant investments in equipment and staffing?  If so, leveraging these resources can make the on premise installation as economical, if not more so, from a total lifetime cost of ownership than the cloud based solutions.

Recently, I have seen several instances where clients have moved commissions and performance reporting to the cloud before getting answers to the questions above.  In one case, data volumes proved to be too cumbersome, and a sophisticated pre-processing algorithm had to be developed (and maintained) after a year of operating a sluggish  solution.

In another, the organization had stringent security protocols, but somehow the cloud deployment escaped the scrutiny of the IT department, and the organization exposed themselves to unnecessary security risk with sensitive information.

The cloud has certainly been a tremendous advancement for Enterprise IT.  Make sure that you thoroughly assess your security requirements, data volumes, and internal capabilities before deciding how best to deploy your SPM solution.

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Incentive Management and Executive KPIs

How well does your incentive management enable your company to deliver on financial goals?

The push to finish strong in 2011 is over and many of us are now heads down again – focused on finalizing incentive payouts, reorganizing sales teams and launching new comp plans for 2012. At the same time, we’re all anticipating company results and how the investment community might react. But, as you prepare for the year ahead, how focused are you on the impact sales performance and incentive compensation management can have on the financial measures your executives are reporting against?

The ability to effectively design and execute on incentive compensation plans can have a significant impact on what your CEO reports each quarter. More specifically, the financial measures that investors and Wall Street care about – growing operating income, improving net profits, and improving earnings per share – are significantly influenced by sales performance. So, how well incentive management is aligned to motivate sellers to execute on these goals is a key lever in driving financial performance.

Example:

Consider incentive compensation and its impact on improving sales at a multi-billion dollar company. The company’s strategy is to provide innovative solutions to its customers, leveraging a full portfolio of products and solutions. Executing this strategy requires the sales organization to make an important transition from selling in product silos to selling across the full portfolio through national, industry-focused sales teams.

One of the company’s largest business units (Business Unit A), plans to expand its $500M in annual revenue with a strategy driven by the national sales teams. However, due to a variety of incentive compensation processing challenges (data, systems, and operations), they haven’t been able to consistently pay the national “overlay” sales teams. As a result, the national sales team’s interest has faded and after an initial push they’re no longer emphasizing a critical portion of the portfolio with customers.

Let’s examine the potential impact to executive level financial measures if the company could have executed on the compensation plans more effectively:

  •  An estimated recurring $200M of Business Unit A revenue comes from national accounts and a 25% increase in new revenue is reasonable with a motivated national team
  • The resulting $50M increase in revenue would contribute $11.5M growth in operating income, $7.5M growth in net profit and $0.06 EPS growth.

The incremental impact on YOY Net Income and EPS growth are compelling:

  • YOY Net Income Growth would increase by over 20% from ~$33M to $40M, improving the YOY growth reported from 14% to 17%
  • YOY EPS Growth would increase by over 35%, from ~$0.16 to $0.22 per share, improving the YOY growth reported from 9% to 13%

So, the ability to handle incentive compensation can have a big impact. Most CEO’s would be thrilled to improve Net Income and EPS growth as outlined above.

As you plan for 2012, take time to consider how well your sales performance and incentive compensation operation are aligned to driving company financial objectives. Is your compensation back office working tirelessly just to keep the lights on? If so, think about how this group can play a more innovative and strategic role.  By doing so, it’s likely you’ll discover ways that more effective incentive administration and performance reporting can help your company achieve its goals.

We’ll continue to share examples of how our framework aligns incentive management improvements to enable key operational and executive level financial KPI’s, including revenue growth, operating cost control and risk management.

Stay tuned and share your experiences!

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If Your Sales Reps Are Frustrated or Confused, Then Your Comp Plan is Not Working


I’ve worked with companies who spend over a billion dollars on commissions and invest months perfecting their compensation designs each year.  After all, if the incentives aren’t right, they won’t get the right behaviors nor desired sales growth.

Interestingly, when you speak with the sales reps at some of these companies they often don’t share their senior managements’ enthusiasm for the compensation plan. Sometimes these reps use very different language – often colorful, other times completely apathetic.

How could there be such a disconnect in such an important area ?

I think that there are two primary reasons for the disconnect – poor communication and horrific execution.

If you don’t understand or buy into changes to your compensation plan then by definition, you will not be an enthusiastic supporter.  Companies often use up 99% of their allocated schedule (sometimes more) debating new rules and quotas such that little time is left to do a good job explaining why the changes are important, and are a win/win proposition.  After a few years, reps tune out and the power of a clever compensation design falls to the wayside.

Likewise, if you are being paid slowly, incorrectly or can’t figure out how your commissions were arrived at, then you are unlikely to be dazzled by this years’ brilliant design.  In fact, all of the money spent with fancy design consultants was probably a complete waste if you can’t execute well.

Are you burning up your design and implementation schedule trying to attain plan perfection while under investing in solid execution ?

A simple,  common sense plan that is communicated and executed well will beat the “perfect” plan executed poorly any day of the week.

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The Customer is Always Wrong?

Recently I watched a movie called ‘A Good Year‘ starring Russell Crowe and Albert Finney.  It is filmed in southern France and in one scene, Russell Crowe helps out a love interest by becoming a waiter for the evening at her busy restaurant.  As she quickly orients him to his new role,  she says ‘Remember ….  in France the customer is always wrong’.  I thought this was hilarious but then began to realize how frequently I saw evidence of this mindset in my day job.

Although it is not as blatant, if you scratch the surface at your organization you may find your own version of the ‘customer is wrong’ mentality.

For example, I often hear “Our sales reps do not understand our compensation processes, statements … <fill in the blank> “.

Sales reps are paid to sell and service customers and are not known for reading technical manuals and instruction booklets – that is why they are good sales people.  So, if a process or statement is so difficult to understand that it requires specialized training then it hasn’t been designed correctly. Period.  This is the same phenomena that has made Apple computer so successful.  While PC guy designs complex, hierarchical menu structures that any computer science major would see as perfectly logical, Mac guy comes at it from the customer’s perspective and delivers innovative products that are adored by their loyal, evangelical customers.

Take a look around your organization for places where your customers are “wrong” and redesign it from their perspective.

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How to Select a New Sales Compensation System

Recently I have received a number of inquiries that go like this – “We are evaluating company A, B and C – which one would you recommend?”  Which one is best depends on what problems you need to solve.  The most common mistake I see during the software selection process is a checkbox focus on functionality versus ‘How can this solution solve problem x for us?”  In fact, many times the biggest mistakes are made before the first vendor presentation.  Let me explain.

When looking for a sales compensation solution the first thing you should do is understand the root causes behind your current challenges.   Where do you spend the most manual effort?  Where are stakeholders most dissatisfied with current outcomes?  These answers usually come quickly.  Then ask – why, why, why and why and this will help you identify the root cause behind your issues.  For example, if your current pay cycle requires a lot of manual effort, the why-why exercise may identify issues such as -

  • Plan designs incorporate measures that are not readily available from our systems, therefore we have to manually piece performance together
  • Sales leaders can’t meet reasonable deadlines and we only get the new plan specs on a napkin a week before the next fiscal years first pay period
  • We are understaffed with only 3 people supporting 1000 payees
  • We have very complex credit allocation rules that our current system can’t support

Obviously, a new compensation system is not going to solve all of these issues, therefore, if you want the new system to be able to work its magic, your implementation program is going to need to address more than just configuring compensation rules.

This exercise will also help keep you grounded in what you need when the software vendor starts confusing you with all of their terminology, pricing plans, special offers and add-ons.
Once you have a vendor short list, I would also recommend that you plan to visit the offices of the 2-3 final contenders to review how they propose to solve your problems.  I find that a visit can be helpful for many reasons including -

  • You can get a real feel for the company, quality of the people, culture etc.
  • When you ask a question in their main conference room, its tough for them to say they left the expert back at the office
  • Its an opportunity to begin building relationships with senior executives that may come in handy down the road

Over recent years Compensation Analytics has diagnosed dozens of  compensation operations and helped facilitate numerous software selections.  Feel free to reach out to us at info@compensationanalytics.com or on (612) 919-6904 for a free half hour consultation.

 

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Sloppy Sales Compensation is Expensive

Processing accurate commissions and delivering high impact performance feedback to sales reps is not a slam dunk for every company. In fact, for some companies it can be a really big hassle for everyone who is involved.  The financial impact of these “hassles” (e.g., inaccurate payouts, ineffective reporting, system flexibility etc.) is significant.  And since most sales organizations are outwardly focused, issues in the sales back office can really fester before getting everyone’s attention.  This is when these challenges can become very expensive.

Do you have reps that have experienced multiple embarrassing commission mistakes?  If one more foul-up is the last straw for only a handful of reps, it could cost your company millions to replace them.

The inaccuracies themselves can be very expensive.  Some studies have shown up to 4% of your incentive budget can be wasted through commission over-payments.  You may also pay concessions to producers to smooth situations when errors occur which adds even more to the cost side of the equation.

What about all the lost productivity during the back-and-forth between the field and the home office?   Is product x eligible for bonus comp?  Why didn’t this deal get paid on the last pay check?  Also, if statements and reports are confusing, sporadic, or incomplete, then your reps will spend time building and updating their own tracking systems to make sure they get paid for everything they sell.  Very few reps are good enough to be productive while their nose is stuck in a spreadsheet or while they are on hold with the home office.  These little distractions can really add up to hours of lost productivity each week.

If your organization is like most companies, you probably spend a lot of time thinking about and perfecting your sales incentives.  To maximize the influence of the compensation plan, it must be communicated effectively and reinforced frequently.  What if your reps rarely receive a comprehensive view of their performance or frequent encouragement to help them attain their goals?  Without understanding and reinforcement, your carefully designed incentives will never have a chance to fully work their magic.

Finally, since many sales comp back offices are consumed with the day-to-day, there is little capacity to support the urgent and important initiatives that will help the organization hit its sales targets (e.g., SPIFs, contests etc.).  These missing capabilities can result in an organization missing its top line numbers and disappointing investors.

Below is an illustration of how shortcomings in the back office can really add up to impact revenue and profitability.  Don’t let your back office quietly fester and your profits leak away.

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The State of Performance Reporting In the SPM Arena

In the 10 years that I have been a business intelligence architect in the compensation space, I must admit that I am surprised at the lack of progress I see in the arena of performance reporting.  In this time, very few companies have graduated from the basic transactional and summary style reports they have produced within their organization for years.  Often, when an SPM implementation is in its visioning phase, there are grand plans for comp plan design, handling compensation dispute resolution, quota management, and the like, but when it comes to reports, dashboards, and analytics,  companies often want to replicate the reporting they have rather than strive to produce more value add business intelligence.

By choosing this path, companies are not realizing the benefits of modern technology and more sophisticated analysis techniques.  For compensation operations management, heatmaps, geographical breakdown maps, KPI tracking and the like are powerful tools that provide at-a-glance reviews of critical information.  Combined with the ability to drill down into information and get specific product, rep, and territory level information these tools are valuable both strategically and tactically.  Such tools also make it easier to measure the impact and track the status of a specific initiative, which is very different than the almost generic reporting functions of the past.

Rather than waiting for an update every month, reps often want to get an update as to where they stand with their sales initiatives on a frequent basis.  The ability to have self service analytics exists today.  Anyone with an enterprise class SAP Business Objects solution should be striving for self-service analytics, yet in 95% of cases the sales operations management is barely using the BI solution.

What accounts for this?  Well, far too often, reporting and analytics is sold as an afterthought, and is an issue which is addressed after the initial comp design is completed.  I personally feel this is a terrible mistake–business intelligence is highly dependent on the quality, granularity, and completeness of the data that flows through the compensation solution.  BI architects should be working hand in hand with compensation rule writers during the discovery phase of the project.

Secondly, rather than looking for a business intelligence architect that can bring vision and shape to the data universe in which the compensation operations group can realize value and strategic insight in working with, management believes they know the set of information they are interested in and look for a “technical report writer”.  This “contractor” will take the short order cook approach to building reports and dashboards.  Too often, the end result is diner style fare.  With the high quality ingredients of rich corporate data in house, organizations would be wise to entrust a “chef” to prepare and exquisite meal………..the cost may be a bit more, but the value is also far greater.

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The Wild West is Alive and Well

When I think about tasks that require a high standard of care, a few things come to mind -

  • Piloting an aircraft
  • Major surgery, and
  • Calculating and paying sales comp for the thousands of people who together are 100% responsible for your company’s revenue

Most of the time pilots (other than the profanity slewing pilot at O’Hare last week), surgeons and sales practitioners demonstrate a high degree of proficiency and care in their work.  However, every now and then I come across a group that runs by a different set of rules and ends up making life very difficult for themselves and their sales team.

This wild west behavior can show up in a few ways -

  • Constant knee jerk changes to compensation with little analysis of what’s working and what’s not.  Why put yourself through all that work and then been apathetic about the outcomes?
  • Code management and testing practices.  Let’s try something new, not test it and then put it straight into production.  This is a great way to create a really complex ball of yarn that needs to be untangled – yet it happens every day.  Discipline and skills need to be in place to protect everyone’s hard work and to ensure that only proven solutions are migrated to production.
  • Planning, estimating, resourcing and communication of deadlines.  A pilot would not tell you that your flight from New York to San Francisco will take 6 hours and then only take on 2 hours of fuel.  Sales comp practitioners need to be better equipped to have courageous and informed discussions with their stakeholders to avoid accepting mission impossible.

That’s my rant for today :)    Be careful out there!

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Progress?

Over the years we have come across some interesting “solutions” that were implemented under the banner of progress.  Unfortunately, a number of these implementations were quite expensive and the business results were not so impressive. Too often, there seems to be the belief that new technology will fix all that is ailing compensation processing.  Ah …. only if it were true.

When business process design is given the light treatment and the focus is on loading rate tables and developing ETL routines to existing data feeds,  then the program becomes a calculation migration project and a big opportunity was squandered. These programs typically yield solutions with the following qualities -

  • Additional complicated and unfamiliar manual processes vs simplification
  • New technology to support vs consolidation
  • Little to no improvement in reporting
  • Millions of missing dollars
  • Burned out operations and implementation teams

Too often solutions are hastily “designed” in the absence of an understanding of the underlying root causes behind current short comings.  Here are some of the most common issues we have come across when digging into compensation problems -

  • Missing or inadequate transaction data driving comp calcs
  • Poor sales hierarchy hygiene resulting in cascading calculation errors
  • Redundant processing (e.g., everyone creates the same report)
  • Lack of controls and high dependence on a few miracle workers
  • Constant plan changes coupled with immature development and testing capabilities
  • Under resourced commission and service teams  (i.e., capacity and skills)
  • Poorly integrated and supported calculation systems
  • Inadequate communication between sales operations (design team) and commissions resulting in churn

Technology can play a big role in solving some of these problems … however, when technology change is coupled with challenging outdated policies, redesigning core processes and addressing organizational issues … then, real progress can occur.

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