Most companies offer some type of variable compensation to their sales team for the purpose of driving corporate revenue. However, many still use spreadsheets and disorganized processes to manage this key motivator of the sales force. There is a better way.
Few sales organizations perform optimally. That's the bad news that is shaping bottom lines in companies of all sizes, in every industry, nationwide. Fortunately, there's good news as well. According to recent benchmark research conducted by Ventana Research, most companies have the potential to substantially improve multiple aspects of the performance of their sales organization. By paying greater attention to the management of their compensation of sales representatives, they can improve the motivation of their sales force and boost their chances of meeting revenue targets. Even better news: Doing so may not require a large investment of resources.
Toward this end, companies across the country are considering what we call total compensation management, which is to say that they are evaluating opportunities to streamline their compensation processes and to make pay policies more transparent — and perhaps more logical. Total compensation management is the practice of centralizing management of the processes and systems responsible for the full compensation of every individual in an organization, including base pay for both hourly and salaried employees; benefits; and merit or variable pay in the form of cash, stock, and other incentives. (For more on managing compensation holistically throughout a company, see Compensation Counts: How a Holistic View Can Boost Performance in the September 2008 issue of BPM Magazine.)
Although the practices that comprise total compensation management can provide big benefits for an organization as a whole, using a total compensation management approach to compensation of the sales force, in particular, can have a more direct impact on a company's revenue stream. To improve sales compensation processes, a company must reshape the policies that determine the variable incentives and noncash rewards it pays for sales achieved or revenue received. Tackling sales compensation is well worth the effort; there's a good reason why compensation management is a subset of performance management. Giving adequate attention to sales compensation practices ensures that pay processes for the sales team are aligned with the organization's strategic goals. Thus, such a project necessarily contributes to improved corporate performance, profitability, and competitiveness.
Getting started with sales compensation management can be challenging, however, because it requires that order be brought to what has historically been a messy collection of one-off arrangements. For many organizations, sales compensation is a complex — and potentially contentious — issue. To make matters worse, companies tend to be inconsistent in both how they determine individual sales achievement and how they schedule the timing of payments. These inconsistencies open the door to perceptions on the part of sales staffers that variable compensation is being administered unfairly. Improving confidence in the accuracy of compensation processes is crucial to achieving the right motivation within the sales force. But too often, developing confidence among the sales force in the company's compensation practices is a challenge. According to Ventana Research's benchmark research on sales performance management, only 41 percent of business managers are confident or very confident in how their company manages sales operations and performance. Thirty-three percent are either not very confident or not at all confident (see exhibit 1).
Don't Overlook the Link to Strategy
Sales compensation is a critical activity. It can help make salespeople more efficient, or it can distract them from their goals. Ultimately, the quality of sales compensation processes has a dramatic effect on a company's ability to execute on its strategy. We believe that organizations should pay as much attention to sales compensation management as they do to accounting processes and systems. After all, failure to effectively execute sales activities means that the business is failing to generate as much revenue as it could, and thus that it is underperforming.
It's fairly obvious that a well-calibrated compensation management system is essential to effectively executing on revenue-generation strategies. Nevertheless, our benchmark research found that two of the most common impediments to successful management of the sales team are inconsistent execution (47 percent of our respondents) and an overall lack of sales processes (38 percent). Processes in areas of sales such as revenue forecasting, incentive calculation, and territory management are imperative to achieving corporate revenue objectives; it's alarming that so many companies lack some of these basic procedures. But companies for which this scenario sounds familiar can take heart. Recognizing the impediments that poor sales compensation practices place in the path of improved corporate performance is an important first step to removing those obstacles. Once a company sees that it has a problem, it can begin plotting solutions.
A good place to start whenever processes are inefficient is to analyze, and overhaul if necessary, the company's information systems. This is particularly true for sales compensation processes. In our benchmark research, the number-one impediment to motivating the sales staff — an impediment cited by more than half of respondents — was scattered information (see exhibit 2). Accurate and consolidated data about sales activities is absolutely necessary for a company striving to maximize the motivation and productivity of the sales force. Unfortunately, most types of business systems that companies are currently using to monitor sales compensation processes were not designed for that task. For example, sales-force automation (SFA) applications focus on tracking sales accounts, contacts, and opportunities, but they don't focus on managing compensation.
Sales compensation management processes affect everyone who has variable cash or noncash components to his or her sales-related compensation, and that is usually a large proportion of the sales force. The majority of our research participants reported that more than 75 percent of their sales force receives incentive pay. For 37 percent of participants, every salesperson in the organization has incentive compensation. Responsibility for managing sales compensation processes across the wide swath of people affected by them is usually borne jointly by the head of sales operations and by the sales management team. Finance is typically also involved in the approvals of sales budgets and in the actual payment of earned variable compensation. It's crucial for an organization's compensation management process to meet the needs of all of these constituents.
According to our research, the three most important management capabilities in a sales-compensation software system are the ability to track sales progress toward forecasts (49 percent of respondents), the ability to track the performance of individual sales representatives (44 percent), and the ability to monitor payment of commissions (27 percent); see exhibit 3. An effective sales compensation management application should provide access to current information in each of these areas whenever management seeks it. Unfortunately, our research found instead that almost half of organizations (47 percent) access critical information about payment of the sales force through spreadsheets, which are static by nature and are not designed to be an enterprise management tool.
Development of Effective Plans
Sales compensation plans are agreements between management and members of the sales force. They reflect the company's revenue expectations, and they are built from compensation models that factor in territories, customers, prospects, and products. A best practice for sales compensation management is to ensure that the entire process — from design to payment — is well-managed.
Organizations that want to redesign how they develop sales compensation plans must proceed carefully because of the level of emotion the issue can raise. Decisions about compensation policies need to be made by a program team that represents finance and sales management, as well as sales operations. Including representatives of all of these functional areas ensures that the team will maintain the right focus. When this cross-functional team is in place, it can reevaluate existing sales plans and the compensation policies that support them, in order to better align salespeople's activities to the company's revenue priorities. Note that it is crucial to make sure that the reevaluation of sales compensation practices focuses only on new sources of revenue. Allowing reconsideration of sales already completed is counterproductive. In addition, the cross-functional team should reevaluate the software that supports the company's sales compensation management policies.
This software should provide the information corporate executives need to improve their revenue forecasting capabilities and to strengthen decisions that affect the sales team's focus on strategy, but these are not the only considerations in a purchase decision. Software applications that streamline sales compensation processes must have the flexibility to create the programs the team chooses for the company, and then to track those programs' implementation. According to our research participants, the most important capabilities for sales compensation management software in terms of its support of activities around designing and tracking salespeople's pay are calculating sales commissions accurately (36 percent of respondents), designing sales incentives to achieve business goals (31 percent), and modeling optimal sales compensation plans (25 percent). See exhibit 4. Happily, the ability to model compensation by territory has become pretty standard in sales compensation management software. Companies can use these systems to generate sales plans based on the model, then store those plans for reference, which eliminates the danger that different individuals encounter different versions of a plan. Our research found that many organizations use spreadsheets for sales compensation management, so features that are standard in applications dedicated to sales compensation management may offer great relief to problems of scattered information.
An organization reviewing its sales compensation practices will need to link its dedicated software system to other business systems; smooth integration is necessary for streamlining end-to-end enterprise processes to support both efficiency and effectiveness. Participants in our benchmark research indicated that the systems they feel are most important to integrate with sales compensation management applications are accounting software (41 percent of respondents), sales force automation software (39 percent), and payroll software (35 percent). Addressing these integration needs is imperative for organizations trying to get away from manual integration of data, which introduces the risk of data errors and takes extensive employee time.
Sales Compensation Management Under Scrutiny
Every organization that relies on a sales force to generate revenue should take steps to evaluate both the efficiency and the effectiveness of its sales compensation management processes. By ascertaining its strengths and weaknesses in this area, a company can focus its investment of money and manpower to ensure that sales activities are aligned with corporate goals. The following five steps are key to ensuring that the company makes smart decisions:
Assess your organization's maturity in compensation management. Ventana Research assesses organizational maturity using a four-level scale. In our recent benchmark research, we found that about one in four organizations (27 percent) has sophisticated sales performance management systems that place it at the most advanced, “innovative” level of maturity. This means that three-quarters of organizations must do more to become mature. We advise an assessment of the maturity of your people, processes, information, and technology to determine where you can improve sales compensation management. (For more information about maturity assessments of your sales organization, see www.ventanaresearch.com/spm.)
Understand what you really need. As part of your assessment, make sure you understand what capabilities and information everyone involved — from management to sales reps — needs from sales compensation management. This will help you determine what you need in software. Sales compensation management applications differ in their strengths and weaknesses. For example, some are better at managing variable pay, while others have better analytic or forecasting capabilities. Clearly defining your business, user, data, and technology requirements will help you to identify your unique needs.
Plan a successful program for sales compensation management. In our research, we found that making improvements to sales compensation management software applications is widely seen as an important step toward addressing companies' overall operational and performance needs. The belief in the importance of the sales compensation management process and the lack of confidence in companies' existing methods are two compelling reasons to build a plan for optimal management of sales performance. Enlist sponsors from finance and executive management who will support the required investments and provide organizational leadership for the program and its goals.
Clarify and emphasize the benefits of investments in sales compensation management. An investment in sales compensation must satisfy the needs of salespeople, while also addressing those of professionals in operations and finance. Our research participants told us that the benefits they seek most are increasing revenue and profitability (70 percent of respondents), improving the efficiency of sales processes (54 percent), and aligning the sales force to the business's strategy (52 percent). Using these benefits as examples, determine what new sales compensation management processes or software offer your business, then build a plan that will deliver those improvements.
Invest in sales compensation management to increase effectiveness and efficiency. Our benchmark research identified a disturbing disconnect between, on one hand, the need to improve an organization's processes and confidence in sales and, on the other hand, the small number of businesses that have deployed sales compensation management software. As you investigate your options, consider approaches such as software as a service, which can reduce the time and cost of deploying this type of application. Do not expect that the capabilities you need will be available within your sales-force automation system; it was not intended to manage sales compensation.
Performance and Goodwill
Sales compensation management software benefits members of the sales force; it enables them to easily track their progress toward sales targets and to determine how much pay they can expect. This kind of visibility into compensation plans can improve not only the performance of individual salespeople, but also goodwill among members of the sales force. Additionally, this software can reduce the time required to collect sales and compensation information.
However, helping a sales team optimize performance through improved compensation management requires planning, and likely investment as well. Ventana Research believes the investment is justified because effective sales compensation management can be a key component in motivating the people who bring in the company's revenue. Organizations that adopt sales compensation management best practices experience improvement in both the focus and the productivity of the sales force while ensuring that the review and auditing of payments is managed efficiently. We recommend deploying a dedicated application that brings together all the relevant information and makes it available to everyone concerned with sales activities and management. A commitment to making compensation plans work as well as possible is a key step toward better overall corporate performance.
Mark Smith is the CEO and executive vice president of research for Ventana Research, a benchmark research and strategic advisory services firm providing guidance to help organizations optimize performance.