Are Sales Incentives Even In Tune With the Corporate Strategy?
Written By: Predrag Jakovljevic
Published On: November 28 2006
Incentive compensation plans are designed to motivate sales and service professionals to achieve goals and strive for excellence. But an alarming fact is that these same compensation plans are often at odds with the corporate strategy of customer satisfaction, since sales employees, in their zeal to earn more, often lose sight of what is importanttheir customers needs and the companys strategy.
Part Two of the series Thou Shalt Motivate and Reward Workforce Better.
If the company wants to increase sales of a new product line, for example, but the direct sales and indirect channel still receive hefty incentives favoring existing product lines, the sales folks will logically not care to pursue sales for the new (unrewarding) product line. Conversely, if a new plan at a research or analyst house compensates salespeople only on ongoing usage of research (and not, for example, on original contracts), will fewer new contracts be written as a result? Also, what if a manufacturing companys sales folks are paid on the volume of purchase orders, and keep selling under heavy discounts, or by over-promising non-existing features to customers? The companys profits will likely quickly dwindle, and there are many examples of companies paying immense sales commissions to their sales force (who have, to be fair, all reached their quotas, even if the quotas were inadvertently set wrongly by their superiors), even as the companies in question suffer terrible losses, and possibly go out of business. For more on pertinent issues, see The Case for Pricing Management.
One of the things that is often missing is a good system of metrics for gauging whether the incentive plan is optimally driving revenue. With the wrong metrics or incentive plans, every company is essentially just going out of business faster. Therefore, companies must make sure that they are paying for the most important sales activities, and that those activities are connected to their business strategy and positively contributing to the bottom line (profits). Compensation should pay sales and service personnel to achieve those specific results, even if it means finding a magic formula via a combination of ever-shifting factors, which might include profit, quotas, customer retention, customer satisfaction, product mix, team-based metrics, etc. Finally, calculating compensation can now even be taken outside the sales force to involve those employees who do not directly drive sales. Examples might include paying a marketing person for annual product growth, for designing a product promotion; or a pre-sales person for great software demonstrations to customers; or a specific channel business development person, for channel growth and profitability.
Conversely, rewarding employees for the wrong results can prove especially lethal to customer service efforts. A common call center mistake, for instance, is to reward agents based on performance (such as the number of answered calls) during peak hours, since this can lead to dishonest, yet commonly used, techniques that can dangerously irritate customers. In an effort to reach their call volume goals, agents may place customers back in the call queue (remember the annoying Please hold. Your call is important to us. line?), pass the caller to another agent, or simply hang upall in an effort to quickly get to the next caller, which can severely decrease customer satisfaction levels and lead to an increase in the customer base erosion. A much better strategy might be to reward agents not simply for call volume, but also for meeting customer expectations (surveyed by a third party), and ideally for the creation and accumulation of new improvement ideas from customers.
Another illustration is provided by an apparel retailer that often fell short of expectations when launching new lines of jeans. This prompted its decision to test market in-store jeans fitters, who were trained through e-learning about the products, how to fit jeans on women, and how to give the best advice. The project purportedly returned a 75 percent increase in revenue, since the fitters began receiving an incentive every time a pair of jeans were sold. There was a performance management solution in the background telling them how they were doing according to their goals, whereby learning, performance, and incentives were all tied together in an integrated way to drive corporate revenue and performance.
In the financial industry, if a bank stops giving tellers incentives for referrals to investment advisers, it should be able to model a what-if scenario of what is likely to be saved in incentives versus the gain from increased investment activity. Or, what if the bank takes away incentives for referrals, but raises incentives based on customer service ratings at branch or individual levels? An astute incentive and compensation software should be able to simulate whether the likely influx of new customers and a lower customer turnover rate will provide a bigger bang for the buck than if those incentives were directed toward investments. Such predictive analysis and forecasting capabilities also come in handy to evaluate various incentive plans, for items such as customer satisfaction, investment referrals, loan referrals and credit card sign-ups, on behalf of more than tens of thousands of eligible employees.
Indeed, pay-for-performance program management tools that allow companies to model, administer, report, and analyze a wide range of metrics by using rules (meaning ways to filter and calculate in the form of an "if-then" statement, where the "if" contains a Boolean expression that selects objects from the database, such as which transactions to use, and the "then" contains formulas that calculate and save new values) are quite superior to more traditional approaches. Such approaches might involve some hard-coded logic or restrictive predefined compensation models, which limit compensation plans to generic, lowest common denominator practices. When they are difficult to reprogram, with no modeling capabilities, incentive programs often cannot be crafted on the fly to meet competitive threats or executive orders, such as a demand to create an incentive plan that would help a bank generate 100,000 new checking accounts by the end of the fiscal quarter.
Ideally, such capabilities should enable the likes of chief executive officers (CEOs) and chief financial officers (CFOs) to quickly determine a company's most profitable behaviors, and then provide the intellectual capital (in the form of information) allowing a company to create pay-for-performance incentives that have a chance of working for the entire company. A dollar of sales is not worth a dollar unless it represents the most profitable sale the company can make, and variable compensation management software should provide the tool needed by senior management to ensure that the interests of all stakeholders can be well balanced, while also allowing management to choose the best path to profitable growth. Last but not least, managers can also use the applications to model changes to their incentive-pay programs in order to fully understand the financial effects of new rules before instituting them.
For background information, see Thou Shalt Motivate and Reward Workforce Better and Thou Shalt Manage Human Capital Better.
Pros and Cons of Homegrown Systems
Sales incentive and compensation software tools allow firms to make nimble, complex decisions about how employees should be paid for meeting and exceeding their targets, as well as helping the companies with getting the right products and services to market faster. The dearth of such packaged information technology (IT) solutions has resulted in the vast majority of companies still performing these tasks on rudimentary, pedestrian homegrown systems. The need for these tools has thus resulted in home as the place of origin for the majority of incentive tools. Indeed, most of the corporate world (up to 90 percent, according to a recent study by the Indian research and analytics company Evalueserve) still relies on tools designed and developed in-house, which means that a sales force's commissions and bonuses are being handled through a Microsoft Excel spreadsheet and Microsoft Access database combination (Excel being the front end, and the Access database occasionally representing the backbone).
To be fair, for companies with small sales forces, low transaction volumes, and straightforward sales plans (where IT departments can handle the workload without impeding the company's capability to introduce new products to market, or without hampering the sales force's ability to sell those products and stay motivated while doing so), an Excel spreadsheet on steroids might work well enough to help them keep track of commissions. Some environments with rudimentary sales forces and sales incentive plans can leverage homegrown sales compensation tools to calculate income and provide motivation to make the most of the existing products, services, and customer relationships.
It is interesting to note that company size in terms of revenue is not a determining factor in deciding whether to use a homegrown solution or a packaged software solution for incentives management. A large global aerospace and defense (A&D) corporation might have revenue in the billions of dollars, but if it is only selling a few complex products (such as jet planes or rocket boosters) to the likes of the US Department of Defense (DoD) or National Aeronautics and Space Administration (NASA), the chances are that it does not need to invest significantly in a full-fledged enterprise-level incentive and compensation management package. On the other hand, for insurance, retail banking, and consumer goods environments, where one is selling hundreds of items in a week with different types of incentive plans, it becomes very difficult to calculate quickly and accurately enough to get payments out on time.
There are three determining factors for the delivery model a prospective user company should select when considering a compensation solution:
- the size of its sales force;
- the complexity of its sales plans; and
- transaction volumes.
As a rule of thumb, homegrown spreadsheet-based solutions are best suited for companies with approximately two dozen sales representatives or less. The primary advantage of a company building its own system is the upfront license fee cost savings over paying for a vendor's packaged solution. The fees for a vendors packaged solution can range up to a few hundred thousand dollars. However, companies must keep in mind the requirements placed on their IT department when using a homegrown solution. As soon as there is notable sales force expansion or more complexity within the sales plan, a homegrown solution may quickly become inadequate. This is particularly true when one starts talking about credit assignments or splits, overlays, tier or ramped rates, and adjustments or overrides (as when products get returned); these events create a lot of variables, and user companies will be limited in functionality by the basic database, eventually needing the in-house capability to write a lot of code. Last but not least, system limitations can delay new products or services in getting to market, as a company's IT department will be too busy updating the corresponding incentive plan in-house to engage in facilitating sophisticated simulations and modeling.
Managing incentive compensation for 150 employees via Excel spreadsheets becomes quite a labor-intensive manual process, burdened with errors, whereby sales employees lose confidence in the companys ability to accurately produce sales reports and incentive payments. When the financial quarter ends, the financial folks begin calculating incentives, and it then takes them several weeks to pay. After that, the finance department typically spends the next few weeks putting out fires and making corrections, so that almost every quarter is consumed by paying incentives. Given that such limitations should not exist within a top-of-the-range packaged incentive management solution, they are typical signs that indicate a company's homegrown incentive tool is beginning to burst at the seams. If products or services are repeatedly being delayed to market, if the system of spreadsheets and e-mails is not holding up to audit and regulatory expectations like the US Sarbanes Oxley Act (SOX) (see Using Business Intelligence Infrastructure to Ensure Compliancy with the Sarbanes-Oxley Act), etc., the time might well be ripe for approaching an incentive specialist.
A more elegant solution instead feeds the incentive data into a reports server, which then shoots an e-mail alert to senior management. In turn, managers can then tweak individual bonuses, and use the software to track how each salesperson is faring in hitting target numbers. Salespeople can also be sent e-mail attachments with several reports detailing how they did the previous month, and letting them drill down further into what they have sold and what it is worth (in terms of their rewards too). Furthermore, an online sales plan document approval system should allow companies to sidestep the time-consuming task of distributing paper-based compensation plans with an accompanying cover letter via postal mail to individual sales representatives, and then waiting for them to review and accept the plan with a signature. This process, repeated annually with a plethora of individual comp plans, can be alleviated via online processes, with the document approval feature.