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Synygy, Inc.

The finance department should take a leadership role in improving the way itsorganization manages sales compensation.

The sales compensation plan – whether for salespeople, brokers, agents or any other direct or indirect sales channel – is a critical component in corporate strategy execution. If properly designed and modeled, an aligned sales compensation plan tells the salesforce what it needs to achieve to help the company meet its objectives.

Yet when it comes to the management of sales compensation plans, many organizations fail to recognize its importance as a strategic tool for increasing revenue and profits. For the most part, sales compensation plan management is still addressed with homegrown systems, spreadsheets and manual processes.

Many companies, whether they realize it or not, are being saddled with the side effects of poorly managed sales compensation plans (see Figure 1). From the surface it may seem that everything is under control; however, upon closer look, there are almost always areas for improvement that can lead to better salesforce effectiveness, productivity and performance.

Areas for Improvement

There are seven categories of sales compensation management problems that result in the ineffective design, implementation and management of sales compensation plans:

1. The inability to design, implement and manage sales compensation plans that align with your strategy;
2. The inability to design and build meaningful plan models, analyze and interpret model results, and use model results to design plans and plan changes;
3. The inability to design, produce and deliver understandable and useful participant information;
4. The inability to process results consistently and accurately, and uncover, diagnose and fix causes of errors;
5. The inability to design, produce and deliver meaningful management information;
6. The inability to respond to desired changes in data, plans, reports and work flow quickly and accurately; and
7. The inability to process results consistently, quickly and accurately while also handling exceptions and doing nonroutine value-added work.

What Are the Root Causes?

When most companies do get around to acknowledging their sales compensation management issues, they often attribute the problems to an inflexible system. In truth, this is rarely the case. Occurring throughout the design, implementation and management of sales compensation plans, the problems causing breakdowns between strategy formulation and execution can all be traced to three root causes (see Figure 2):

• Inflexible systems;
• Inefficient processes; and
• Lack of expertise, experience and time to implement and manage the processes.

In most sales compensation systems, the logic of the plan is hard-coded into the data extraction and integration routines, the crediting methodology, the earnings and payment calculations and the report creation and distribution process. Even a minor change to any one of the parts of the system becomes a major programming project.

Problems occur when hard-coded systems collide with the frequent need to tweak sales compensation plans to keep them up to date with company strategy objectives. The resulting constraints mean that plans cannot be rapidly and frequently modified, and plans become out of alignment with strategy.

While many problems are often blamed on an inflexible system, the more common root cause of the underlying problems is related to labor-intensive, manual, inefficient processes that cause errors, produce delays in payments and reporting, trigger excessive disputes and inquiries from the field, and result in unproductive rework by already-constrained resources.

Most problems with inefficient processes stem from poorly documented or manually operated processes related to data extraction, integration and validation. These upstream processes cause many of the downstream problems. If problems can be discovered and corrected after each step in the process – rather that at the end – delays and errors are eliminated.

Finally, sales compensation management is a complex administrative process with significant strategic implications. Salespeople must be paid accurately and on time. Sales management needs a good understanding of the performance of their people. And executives need visibility into how the plans are working so changes to plans can be designed and modeled.

All of these processes require specialized expertise and experience – and sufficient resources with enough time – to be performed well. Most organizations lack an understanding of best practices associated with sales compensation management, not to mention a lack of a consistent, reliable source of expert resources.

Symptoms of Sales Compensation Management Problems

All seven problems previously outlined manifests its own set of symptoms. From a finance standpoint, experiencing any of the following issues could indicate the presence of one or more problems:

• Sales commission budget variance of more than 5 percent;
• Commission costs that are rising faster than revenue;
• Earnings restatements due to inaccurate compensation liability predictions;
• More than 1 percent of salespeople granted exceptions to correct “unfair” payments;
• More than 1 percent of salespeople disputing results;
• More than 1 percent of salespeople submitting inquiries about how the plan works;
• Manually fixing errors with adjustments to input files or changes to computed payments;
• Difficulty incorporating salesforce acquisitions or reorganizations;
• Late results or late payments; and
• Delays or high costs associated with making plan changes.

The Role of the Finance Group in the Management of Sales Compensation

The role finance plays in the management of sales compensation varies depending on organizational structure. There are some organizations where finance is barely in the picture and others where finance is managing the entire process.

Since sales compensation is such a huge expense at most organizations, the CFO should take a lead role in improving the accuracy of the calculations, eliminating overpayments and cutting the costs of errors, rework and plan mismanagement.

Once an organization decides to pursue a sales compensation management solution, more and more finance executives are entering sales discussions early. In some instances, the finance department may not only take the lead in improving the management of incentive compensation, it also controls day-to-day operations.

Because regulations and sales strategies vary by location, global organizations usually localize their management of sales compensation. While decentralization makes sense from that perspective, this approach does not necessarily give organizations visibility into commission plans, in terms of strategic alignment and effectiveness.

To gain increased visibility, improve financial controls and ensure strategic alignment, some companies have begun a concerted move toward centralized management through the finance group, while retaining autonomy to modify plan para-meters at the local level.

Value to the CFO

There are some real payoffs when the finance group gets involved in the company’s sales compensation management: cost control, transparency and ROI.

To gain cost control, finance manages and sets salesforce budgets with HR, determining the ratio of salary to variable compensation. When laying the formulas against the company’s financial history, finance can control today’s and tomorrow’s expenditures.

Regarding transparency, there is no longer the need to consult a dictionary to decipher sales lingo or request reports from sales managers since the CFO dashboard provides a comprehensive view of cash flows and compiled, auditable records.

In terms of ROI and other metrics, not only will finance see a direct monetary return on its sales compensation management solution investment, it also will have ready access to metrics like percentage of sales closed, market share, long-term revenue growth and sales margins.

The finance group can also look forward to expanded relationships with other corporate functions, like HR and sales. Involving itself in the purchase, implementation and management of the sales compensation solution helps finance better understand the company’s challenges so it can judiciously fund solutions.

Next Steps

Improving the overall effectiveness of variable pay programs for direct and indirect sales channels begins with:

• Diagnosing the existing sales compensation management problems from a financial perspective;
• Understanding the true financial impact of these problems;
• Assessing current levels of visibility and control; and
• Assessing the internal resources for addressing them.

The organization needs to evaluate its capabilities to solve these problems, not just in terms of technology, but expertise, experience and time.