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The Real Cost of Overpayments and Errors in Sales Compensation

optimization

DEFINITION

Finding an alternative with the most cost effective or highest achievable performance under the given constraints, by maximizing desired factors and minimizing undesired ones. – businessdictionary.com

In sales compensation, poor process optimization can result in overpayments and other costly errors. The number of errors is proportional to the size of the sales force – i.e. they are greatest in companies with global operations. Diagnosing and correcting them falls squarely on sales operations and finance managers.

The Real Cost of Overpayments and Errors in Sales Compensation

(According to Gartner,  overpayments comprise up to 8% of all sales compensation expenditures; Aon Hewitt estimates that over 11% of total payroll consists of variable pay.)

Some overpayments are caused by known but unfixable problems (such as year-over-year discrepancies due to market fluctuations), while human or technical errors are responsible for others. Both can lead to regulatory non-compliance and related auditing fees and fines, as well as decreases in stock valuation.

A chronic cycle of mistakes and corrections often causes high turnover, lost selling time, and an implicit lack of motivation, all of which indirectly cause decreases in revenue and lower profit margins. In the end, the cost of overpayments and errors can spike to hundreds of thousands of lost dollars every year.

Several variables should be taken into consideration when discussing overpayments: the root cause, the impact, the frequency, and the effort required to correct them.

The Undermining Effects of Last-Ditch Efforts

Overpayments mainly occur when last-minute, manual adjustments or corrections are made to data. These interventions become necessary when unexpected changes or other situations that can impact final payments arise; sales compensation analysts, in trying to fix the problem, often must rush the process. In circumstances like these, errors are often unavoidable. The real culprit, however, is the missing piece: an automated system to apply crediting rules for different categories of payments.

Manual errors are just one effect of an integrated system shortage at an organizational level. A holistic approach to the problem, one that includes a system that can capture data as it’s input and at the same time feed that data to different departments for their processing or reporting needs, goes a long way. (Too often, values generated for a report by one department are inconsistent with those generated for a report by another department within the company, even though the same financial barometer is used. Automating corrects this problem.)

When Errors Become the Norm

Determining the exact frequency of errors and overpayments will also help you evaluate the impact of poor sales comp optimization upon your company. The frequency of such errors depends on culprits like (but not limited to) the following:

  • the moment the overpayment is noticed (is there still time/does your organization have processes in place to correct it?)
  • the number of impacted stakeholders
  • the percentage impact on the total payroll

The more frequent the errors, the bigger the ramifications. Repeating the same mistakes will eventually result in demotivation, lack of trust, and confusion both inside and outside the company. Then, the snowball effect kicks in: the financial audit consequences, the company’s damaged image, and the slowing of future development and growth.

We have to fix this!

We all know the hidden dangers of making manual corrections – trying to fix one thing and breaking another. Too many people today are involved in trying to correct overpayments. The ramifications of this over-involvement can spread — not only to the payee, but, depending on the size of the error, to an entire sales team or region. But correcting overpayments is possible in an elegant and automatized manner.

In fact, a system flexible enough to change its purpose over time goes from being used in rare or confined situations, to becoming the go-to solution for making adjustments to dated sales compensation rules and standards.

Embrace change

An organization should always be treated as a living organism because it is, in more ways than one, exactly that. As long as management recognizes how the organization is always evolving – and decides to act accordingly  –  ­a viable solution for avoiding difficult situations in sales compensation is possible. This apparently complex approach, whereby the organization’s openness to change creates the space for increased sales force productivity, thus driving success, is in practice very simple. It boils down to system standardization and automation.

A technologized environment works best when it creates opportunities through flexible frameworks – frameworks that are powerful enough to talk to other systems, easy to configure, user friendly, and, above all, capable of providing accurate and fast results.

8 Critical Considerations for Selecting a Sales Performance Management Solution

Selecting an SPM solution is more than picking a software product. This decision is critical to your organization’s ability to achieve goals. Download this guide to make the best choice for your organization!

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