Are You Getting the Most From Your Sales Comp Plan?

Variable pay is a multi-million dollar cost center and a huge chunk of total compensation in most sales organizations, yet it's doubtful that companies have a good handle on it. In a May Business Finance online poll, 46 percent of respondents said that their company pays out more than $5 million a year in variable comp, but an eye-opening 29 percent were unsure of the total cost.

What's more, fully one-half of the execs polled were unable to say roughly what the error rate is in their variable comp payments.

Estimates of the average error rate in variable compensation plans vary, but it's certainly not trivial. Among companies using manual systems, commission overpayments range from 3 percent to 8 percent of total incentive payments, according to Gartner Inc.

Companies are losing out in other ways, too, by failing to optimize their sales compensation plans, according to the 2008 Sales Compensation and Performance Management Study from research firm CSO Insights.

For example, a well-designed compensation plan might be expected to influence sales reps to sell new products. But only four out of 10 companies in the CSO Insights study reported that their plan achieves that goal.

About the same, rather disappointing, proportion felt that their plan had a positive effect in encouraging reps to avoid excessive discounting. (Respondents in the Business Finance poll were even less likely to report that their company rewards reps who discount less; only about one-third did so.)

Even more tellingly, a meager 34 percent of companies feel that their sales compensation plan influences salespeople to sell higher margin products, according to CSO Insights.

Clearly, sales force compensation management is an area where a little CFO intervention is called for.

Here are the full results of the Business Finance poll:

1. What is your organization's total annual variable compensation expense?

2. What is your organization's approximate error rate in variable compensation payments?

3. Does your organization currently measure and compensate differently for reps that discount less?

4. How important is it to your organization to utilize non-cash reward incentives to motivate behavior and augment cash compensation programs?

5. Does your organization currently manage the process of compensation plan distribution and approvals electronically?