6 Sales Compensation Problems that Require Urgent Diagnosis
Whether for salespeople, brokers, agents, or any other channels – sales compensation plans are critical organizational levers to drive desired behaviors and performance. Yet, when it comes to the management of these plans, many organizations view it as an administrative process rather than a strategic tool for increasing revenue and profits.
Most companies are saddled with the effects of poorly managed sales compensation plans. Sometimes, from the surface, it may seem that everything is under control. However, when you take a closer look, there are almost always areas for improvements that will lead to enhanced sales force effectiveness, productivity, and performance.
The following study article – which is based upon an analysis of more than 100 companies with large sales forces – examines the problems that occur during the design, implementation, and management of sales compensation plans that cause breakdowns between strategy formulation and execution. The paper aims to help large enterprises diagnose their sales compensation management problems before they start impacting their performance.
If properly designed and modeled, a sales compensation plan is aligned with the organization’s strategy. An ideal plan tells the sales force what they need to do to help the company achieve its objectives. (Figure 1).
Though such a closed-loop process could seem unbreakable, problems frequently arise, produce errors, and disrupt the chain of causality. To be able to diagnose your sales compensation issues, you first have to identify them.
Figure 1 – Closed-loop strategy execution process
Optymyze’s analysis on over 100 companies found six categories of problems that cause ineffective design, implementation, and management of sales compensation plans:
1. Strategic Misalignment
“When CEOs talk strategy, 70% of the company doesn’t get it,” according to research published by Forbes. Harvard Business Review indicates that as little as five percent of the workforce understands company’s strategy. An Optymyze study also found that 68 percent of sales and finance executives believe their sales compensation programs fail to drive behavior or align their teams towards specific goals.
Symptoms of Strategic Misalignment
To assess whether your sales compensation plans are misaligned with your strategy, ask yourself if any of the following symptoms are present in your organization:
- plan designs are simplified or modified because they could not be implemented and managed
- commission costs are rising faster than revenue
- plans haven’t kept up with changes in strategy and objectives
- frequent use of contests and SPIFs
- frequent exceptions to plan rules
- pressure to find ways to “pay the top people” because they are underpaid
- salespeople paid for undesirable behaviors
Strategic misalignment can be tackled by eliminating constraints in the plan design, implementation, and management. This results in plans that are aligned with strategy, leading to higher revenue and profit.
Almost 7 in 10 sales and finance managers think their compensation plans fail to drive desired behaviors.
Source: Optymyze study on 100 organizations
2. Misunderstood Plans
The human resources firm Towers Watson has found that companies with effective internal communications command a stock market premium over competitors with poor communications. Such companies are also more likely to report higher levels of employee engagement and lower turnover rates. This underscores the importance of making sure that salespeople understand the strategic objectives of the company and the compensation plan that embodies them.
Symptoms of Misunderstood Plans
How well do your salespeople understand their plans?
The answer lies in several symptoms your organization might be experiencing:
- inquiries about how the plans work from more than 1% of salespeople in the past year
- plan documents are late, lack clarity, are too long, or simply don’t exist
- salespeople and sales managers have difficulties explaining how the plan works
- sales force behaviors are inconsistent with the plan goals
- lack of frequent, clear, concise performance information for each salesperson
- lack of a single, consolidated view of all plan results, including SPIFs, for each salesperson
To address misunderstood plans, managers should make sure that salespeople get the strategic objectives of the company and the compensation plan that embodies them.
The pay-off for a strong pay-for-performance compensation program is an increase of $18k in market value per employee.
Source: Research by Mark Huselid, Professor of HR Studies, Rutgers University
3. Errors in Results
Even when plans are aligned to the overall strategy of the company and understood by sales forces, errors cause confusion and frustrations. Hewitt Associates indicates that variable pay is over 11 percent of total payroll on average. Our own studies show overpayments and other errors occur when organizations are unable to accurately process results, diagnose, and fix systemic problems.
Symptoms of Errors in Results
With errors accounting for such huge costs – many of which are unknown – it is important to assess whether your organization is experiencing any of the following symptoms:
- inquiries or disputes from more than 1% of salespeople in the past year about potential errors in results
- adjustments or payment corrections affect more
than 1% of salespeople in the past year
- lack of trust in results, causing salespeople to do shadow accounting and challenge anything they are unsure of
- failure to catch errors early in the process, before salespeople see their results
- attempt to manually fix errors with adjustments to input files or changes to computed payments discovery of previously unknown errors made in the past
When errors in results are eliminated, an organization experiences the positive impact of having salespeople that have complete trust and confidence in the accuracy of plan results and the information provided to them. Maybe just as importantly, a company is able to meet increasingly strict government regulations with respect to the accuracy of financial results.
4. Lack of Information
The inability to design, produce, and deliver meaningful information to sales managers prevents them from making informed decisions. Only 20% of companies use proactive and investigative techniques to answer questions about “what if” scenarios regarding their business, according to a Sun Guard survey. The lack of proactive data reporting hinders success of effective business intelligence programs. Lack of information can also harm sales strategies, other studies suggest. This is consistent with what Optymyze has found in its analysis of sales compensation management, with most organizations unable to produce meaningful information for managers and sales reps.
Symptoms of Lack of Information
Think about the executives and managers in your organization. Are any of the following symptoms present?
- managers lack knowledge about the performance of people and the effectiveness of plans
- too much effort required to turn available data and reports into meaningful information
- too many custom reports tailored to specific managers
- too many managers maintaining their own personal spreadsheets
- managers with no timely access to information and relying
- too often on gut-instinct to make decisions
- managers not able to handle inquiries from their people
- frequent special requests for information, causing a flurry of activity
By solving this problem, managers are able to make timelier, more effective decisions rooted in data and analysis.
5. Inability to Adapt
Many companies suffer from the inability to quickly respond to changes in data, plans, reports, and processes as organizational needs evolve. This paralysis in front of change prevents managers from thinking big, and may even wipe out an entire service or business.
Symptoms of Inability to Adapt
There are many indications of an organization’s inability to adapt:
- desired plan changes are avoided, discouraged, or pushed off into the future
- plans have not changed somewhat in six months or not substantially in two years
- frequent adjustments or exceptions to “compensate” people because desired plan changes could not be made
- difficulties incorporating acquisitions or sales force reorganizations
- errors occur when plan changes are made
- delays or high costs associated with making plan changes (even small ones)
- delays or high costs associated with maintaining data, reports, and analyses as plans change
Upon solving these problems, an organization is able to quickly respond to situations that necessitate changes to sales compensation plans. The positive effects of being able to adapt include higher revenue as a result of ability to quickly adjust desired sales force behaviors, eliminate overpayments and errors, and lower administrative costs.
6. Process Inconsistency
Caused by the inability to centralize and streamline sales compensation processes, inconsistency amplifies the symptoms of each of the other five problems. Process inconsistency also exacerbates their costs and consequences.
Symptoms of Process Inconsistency
Process inconsistency makes itself obvious through various indications, many of which you may find in your organization:
- late results or late payments at any time in the past year
- inaccurate results that affected more than 1% of the salespeople in the past year
- long hours worked by staff resolving issues and manually maintain in an attempt to produce timely, accurate results
- difficulty accommodating variations and exceptions that routinely occur in sales and other data
- reliance on a few critical individuals who are effective in their roles
- absence of process documentation, discipline to follow the established process
- lack of time to implement new plans, build models, create new reports, perform analyses, and non-routine work
Upon acquiring the necessary abilities to solve this problem, organizations experience timelier rollout of plan changes, more accurate and timely payment of salespeople, lowering compensation and administrative costs. This also leads to better plans and plan models, better sales performance information, and better data management.
Many companies can’t handle exceptions and non-routine work such as plan design, modeling, and analysis.
Source: Optymyze study on 100 organizations
The impact of all these six sales compensation problems varies for each organization. For some, issues may pass unnoticed for months or even years, until they aggravate and wipe out an entire service, department or company. Sales operations and sales managers are often the first to be blamed for sales compensation problems — which is never a constructive attitude towards success.
Smart companies regularly get sales compensation diagnoses to discover and fix the root causes of these problems, not only the effects. True success only comes from leveraging people with enough time and expertise to implement and manage these processes.
By collaborating with sales performance management experts, organizations experience timelier rollout of plan changes, more accurate payment of salespeople, and lower compensation and administrative costs. This long-term approach leads to better plans, better sales performance data, and more accurate management information, empowering companies to deal with non-routine work.