Rewarding Right with Incentive Compensation Management

Dears,


As the global economy emerges from its three-year slumber, pressure builds for companies everywhere to reinvigorate their growth-generating engines. The most critical component of that engine is the sales force. The despite its importance, the sales function in many companies is not excelling, for two significant reasons: insufficient employee awareness of corporate sales strategy, and basic shortcomings in the behaviors and capabilities of salespeople

Todays Challenge
Some companies have attempted to address these shortcomings by creating a pay-for-performance culture shifting more of what they pay people from fixed to variable compensation in the hope that money will provide sufficient motivation. Yet in doing so, many have confronted a cold reality. The process and technologies on which they have long relied to devise incentive compensation plans are woefully inadequate to meet today’s unpredictable business environment. Changing customer demands require more agile sales strategies and far more flexible incentive management programs. While companies expect to use variable and incentive compensation to motivate the Sales force, the shortcomings of their current capabilities for managing incentives often compel them to take overly reactive measures.

Incentive management also is a pain point in many companies. We have found many organizations suffer from key shortcomings that make it difficult to more effectively influence sales force behaviors. At the most basic level, incentive compensation administration is cumbersome and error-prone because most companies rely on inadequate homegrown technology applications or elaborate multilayer spreadsheets. Besides being hard to adapt when market conditions change or product lines evolve, these systems often result in higher administrative costs, decreased productivity and lost sales force confidence in the overall incentive compensation process.

Consider, for example, the complex implications for compensation when sales territories are realigned or sales positions are changed mid pay period. Such changes require the enterprise to track and calculate accurate incentives for both former and new staff assignments not only tracking direct sales credit but also accounting for multiple shared credit assignments. Clearly, the administrative challenge for such legacy-constrained enterprises is immense and often results in overpayment of compensation.From a behavioral perspective, sales participants often drop the ball when making the transition to new assignments. Introducing transition bonuses often is impossible or, at best, quite difficult and costly. As a result, companies generally wait out changes until it is convenient to change the compensation system, which grossly reduces the company’s ability to adapt to market changes.Furthermore, such legacy applications often limit companies from launching new incentive plans and measures in many cases, imposing lead times of three to six months and significant direct technology costs to implement incentive plan changes. Often companies decide the prospective IT expense cannot be supported, thereby delaying the rollout of new market-competitive plans and further burdening an already manually intensive process (with all its attendant risks and potential for error).

Making matters worse is the lack of attention that incentive management receives from senior executives. We conjecture that if executives were asked to name the top 10 capabilities most critical to fund in order to improve sales performance incentive management would consistently come out at number 11 or 12 on the list. At the operational level, the typical large organization has, at most, 10 to 14 people administering incentive compensation. Because senior executives tend to view improving the administration of incentive compensation as simply an exercise in operational effectiveness, the corporate gains of increased efficiency for 10 people will probably not generate sufficient excitement. If executives expanded their view of incentive management as a key strategic tool, they would acknowledge the implications of ineffective incentive management to extend far beyond negligible productivity concerns with a dozen employees.

A New Approach to Incentive Management

Improving the incentive management process is critical to a company’s ability to meet target sales objectives. There are two distinct approaches to improvement, each with its attendant benefits.

The most basic approach, and the one that companies most often embrace, involves focusing strictly on upgrading the technology used to administer incentive compensation programs. Certainly, this is a step in the right direction. By refreshing the technology, a company can relieve some of the administrative burden and subsequently reduce compensation cycle times, improve compensation accuracy and cut administrative costs.

However, in our experience, companies can realize much larger and more strategic benefits by approaching incentive management improvement opportunities with a holistic perspective and featuring next-generation incentive management technology solutions as central components of business process-led programs. More than simply involving a technology upgrade, such an approach addresses the deeper need to more closely align sales force behavior with sales and corporate strategy and, consequently, improve revenue while reducing incentive compensation management administration costs.

This approach views the incentive management process as comprising four principal elements:

o Plan design, which covers such issues as sales planning; compensation budgeting; objectives, quota and territory management; incentives design; and integration with total rewards.

o Plan set-up and administration, which includes plan modeling; business rules definition; plan creation and changes; hierarchy and participant management; and sales plan communication.

o Incentive compensation processing, which involves data gathering and validation; sales credit assignment; compensation calculation and payment; research and inquiry management; and adjustment processing.

o Reporting and analysis, which covers query, reporting and analytics; earnings estimation; plan diagnostics; and audit trails.

Today, compensation professionals spend an overwhelming majority of their time on setup, administration, adjustment processing and reconciliation. By creating a more effective incentive compensation process, a company can free up these individuals to focus on the more value-added activities of design, modeling, forecasting and analysis. Next-generation incentive compensation management software provides tools to further support those value-added activities, thus transforming incentive management from a primarily administrative task to a more strategic activity with a much broader and more significant impact on overall corporate performance. In short, this approach replaces a company’s inefficient and ineffective incentive compensation management legacy application and processes with an optimized incentive management capability that encourages more appropriate sales force behavior.

Benefits of Improved Incentive Management

The biggest benefit of this optimized capability is the tangible integration of the sales planning and incentive compensation management functions, enabling changes in corporate and sales strategy to rapidly travel through the sales compensation plan and the plans mechanics, and directly reflect in an individual salesperson’s results and paycheck. Why is this important? In many industries, salespeople often are not fully aware of their company’s current sales strategy. They also typically do not understand how this strategy determines their compensation plan (although it virtually always does) and, ultimately, what they actually earn. From their perspective, the incentive compensation process often appears to be a black box. While improved sales force automation capabilities have improved their awareness of recorded sales credits and deal mechanics at the point of booking, the rationale behind the accounting for their ultimate compensation number is a mystery. An optimized incentive management capability delivers frequent and detailed reporting, self-service tools and access to detailed compensation information, with full traceability from strategy to plan to deal transaction(s) and paycheck. As a result, sales participants become better informed of their individual role in delivery to the sales strategy.

One example of this type of self-service enablement is an online earnings estimation capability. Using such a tool, a salesperson can model what his or her financial reward would be depending on how a deal is structured. Reliable, detailed and frequent Web-based reports help salespeople keep up to date on their quotas and other performance goals. And self-service tools currently delivered through next-generation software solutions enable salespeople to more directly manage inquiries and adjustments on their own, resulting in a more timely resolution because they get the right information when and where they need it. Improved sales force confidence results in reduced shadow accounting time salespeople spend independently reconciling sales payouts and maintaining their own mini-compensation systems.

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