Enter Enterprise Incentive Management and Incentive Compensation Management
Written By: Predrag Jakovljevic
Published On: November 30 2006
Companies with large sales forces, huge product portfolios, and complex incentive plans with many variables
need to offer variable pay based on individual or corporate performance. This need creates opportunities for a new enterprise software category called enterprise incentive management (EIM) or incentive compensation management (ICM), which should provide managers with decision support tools to model various compensation scenarios, measure the impact of those plans on sales performance, and effectively communicate incentive compensation objectives to the selling organization.
Part Four of the series Thou Shalt Motivate and Reward Workforce Better.
For a comprehensive background discussion of incentives and compensation, see Thou Shalt Motivate and Reward Workforce Better, Are Sales Incentives Even in tune with the Corporate Strategy?, and What Makes Incentives and Compensation So Tricky?.
Best-of-breed players like Callidus Software, Centive (formerly Incentive Systems), Incentive Technology Corporation (ITC), which is the recent spin-off from Centive which continues to sell the former Centive's CompCentral on-premise software), Oracle, SAP, Practique Associates, and one of the first companies in this market, Synygy, all provide EIM or ICM solutions. By and large, they enable powerful, flexible ICM by automating many of the major tasks related to sales compensation:
- modeling compensation plans from strategy to execution
- processing and calculating incentive compensation, from sales transaction to accounts payable (A/P) system integration
- maintaining multiple levels of reporting hierarchies, for complete organizational support
- effective dating applied to all major compensation plan components, for flexibility and change management
- supporting business units running on different fiscal calendars and in different currencies
- automating dispute resolution, providing for easy entry, research, and communication of compensation-related disputes
In general, insurance, health care, financial services, and certain manufacturing companies (such as high tech) are prime users of full-blown EIM solutions. Large enterprises with several hundred sales employees use these systems to model, set up, administer, analyze, and report on incentive management plans that compensate employees and distribution channel partners for the achievement of targeted quantitative and qualitative objectives, such as sales quotas, product and territory milestones, and customer satisfaction. That's to say that these software products enable companies to access applicable transaction data; allocate compensation credit to appropriate employees and business partners; determine relevant compensation measurements, payment amounts and timing; and accurately report on compensation results. Furthermore, additional analytics software allows customers to analyze the effectiveness of their incentive programs, which in turn gives them insights into driving greater sales performance. By facilitating effective management of complex incentive and sales performance programs, such products should allow customers to increase sales revenue, make better use of their incentive budget, and drive productivity improvements.
In other words, automating incentive management should not just enable businesses to pay workers more accurately; they also make user companies more accountable, by providing them with better modeling and reporting (so they can react to changing dynamics and improve relationships with their employees). As a result, some EIM providers have lately been drifting away from simply providing big, calculating, number-crunching solutions that help user enterprises pay their employees right, and are rather trying (more in tune with the performance management space) to help companies align strategic company objectives with sales execution. This way, they can be regarded as the execution platform for business performance management (BPM) and corporate performance management (CPM) (see Financial Reporting, Planning, and Budgeting as Necessary Pieces of EPM). Naturally, the focus for EIM is on all customer-facing roles that may have an impact on revenues. Initially used, therefore, for sales force compensation, EIM applications are also finding traction in call centers; in financial institutions for bank tellers involved in cross-selling and up-selling; and in retail situations where employee compensation is tied to store productivity and profitability.
As for a simplified description of how an EIM suite works: one starts by configuring the software to model the internal rules and structure of the user enterprise's commission and bonus programs. The software then imports sales and other performance data from a company's enterprise resource planning (ERP) or back-office system (meaning the sales and service order management and human resources [HR] modules), and calculates the commissions, whereupon it feeds the payment data back into the company's payroll system. Along the way, the software generates reports for managers which can also be used in audits to catch errors and cheating attempts, which is especially important in environments where one of the biggest expense items is cost of sales.
In addition to these policing capabilities (which are not to be sneezed atcompanies keep missing their earnings because they cannot audit their compensations), managers can also use the applications more strategically, to model changes to their incentive-pay programs, for instance, so that they can better understand the financial effect of new rules before instituting them. Business users, without needing to be at the mercy of the information technology (IT) department and nerdy programmers, should be able to leverage intuitive graphical user interfaces (GUIs) with all-too-familiar drop-down menus and check boxes, in order to quickly implement any business rule changesof course after verifying the potential outcome before the payment even takes place.
Naturally, many different organizational parts are affected by and are in need of EIM, starting with top or executive management. In fact, two critical concerns of corporate executives are
- delivering consistent and predictable financial results; and
- ensuring customer satisfaction.
Furthermore, to continually succeed, it is imperative that executives stay abreast of market conditions and adjust strategic business objectives when necessary. Executives must operate their businesses nimbly enough to shift from one major initiative to the next within a very short time frame. Whether the key initiative is revenue growth, driving a competitor out of the market, reducing discounts, expanding internationally, or introducing a new product line, EIM systems can play a crucial role in aligning the actions of the entire company and its partners with overarching corporate objectives.
Regarding EIM programs, executives have traditionally faced various concerns:
Limited ability to align compensation programs and strategic direction
Traditional manual and spreadsheet-based processes make it difficult to figure out how to motivate sales to execute on simple elements of corporate strategy (such as "sell more product XYZ").
Limited predictive impact analysis
Predictive analysis is necessary to forecast the impact of new or modified plans, for instance. Aggravating the problem is lack of access to historical performance data; consolidating prior period spreadsheet data is time-consuming, and often difficult to organize for any meaningful analysis. Executives are thus forced to create and modify incentive plans based on mere hunches, as opposed to a fact-based forecast of financial impact.
From a financial manager's standpoint, incentive compensation represents a significant line item in the budget. Finance staff (and ultimately the chief financial officer [CFO]) are responsible for accurately accounting for variable compensation costs, especially those associated with sales incentive management. Compliance with the US Sarbanes-Oxley Act (SOX) dictates that organizations accurately and properly account for payments made to individuals based on transactions (a product sale, for example). Given the overall fiduciary responsibility that organizations are exercising, the following business issues clearly need to be resolved:
Unacceptably high levels of overpayment
Finance departments not only need to account for the disbursement of funds, but also need to identify errors and inaccuracies. Spreadsheets and in-house systems do not allow for easy analysis of incentive plan payouts, making it extremely difficult to identify potential discrepancies.
The need for more reliable testing and modeling tools
Finance departments are particularly concerned with cost-effectiveness and return on investment for incentive-based compensation programs; without tools to analyze and predict the cost-effectiveness and value-add of proposed plans, they are subject (like their executive counterparts) to "hit and miss" management of incentive-based pay budgets.
Cumbersome and error-prone accounting and auditing
Spreadsheet systems (to say nothing of manual systems) do not lend themselves to easy tracking, resulting in a difficult and time-consuming auditing process.
Sales executives and management, who require tools for creating and changing incentive compensation plans, are also driven to EIM solutions by various factors:
Lack of "operational agility"
Sales management teams have traditionally been limited to an annual plan modification policy, whereby they cannot make on-the-fly changes to existing incentive plans as dictated by market conditions, new product introductions, sales promotions, or corporate strategy shifts.
A shortage of timely data about plan effectiveness, employee performance, and financial impact
Compensation plan data needs to be consolidated in a format conducive to analysis (to properly understand the effect of compensation plans on staff behavior and to develop more effective plans). Management requires analysis and reporting tools that facilitate accurate, timely, and straightforward examination of incentive plan data; this information is required via a mechanism that can be accessed anytime, anywhere (the Internet).
Difficulty in managing commission pay disputes
Traditionally, sales management has to comb through spreadsheets for exact transactions, conduct follow-up analysis and fact checking, check accounts and inventory, and verify records before a resolution can be made. There is thus an acute need for a more efficient pay dispute resolution process to reduce administrative time, and maximize time spent on revenue-generating activities.
Compensation administrators are responsible for the calculation of the incentive compensation payments that go out to the sales force and partner channels, and while working extremely long hours ensuring the accuracy and timeliness of those payments, they must field frequent (and often irate) inquiries from the people they're compensating. As the last line of defense between compensation plan design, and implementation of those compensation plans in a system to calculate payments, they face some key EIM difficulties:
Limited ability to implement management's desired compensation plans
Without the flexibility to support whatever compensation plans are right for the business (the plans executive management wants, and that are appropriate for overall business strategy), compensation administrators are forced to do manual calculations, or to rely heavily on overbooked IT staff to code around system limitations.
Limited ability to query or access all aspects of compensation results
Compensation results include payments, quota performance, sales credits, or performance measures; manual adjustments also need to be made, when necessary. In many cases, while questioning their payments and other aspects of incentive compensation (and then placing calls and sending e-mails to the compensation administration group), the sales representative or channel manager catches an error that needs to be manually corrected by the compensation administrator.
IT Has To Make It Work
Last but not least, IT departments are often the unseen victims of manual incentive management processes, since they are after all responsible for building custom integrations between various transactional, payroll, order management, inventory, and other systems to facilitate the data integration that feeds incentive management systems. They also then have to generate the formulas that spreadsheets execute, and make the modifications desired by the sales and finance departments. Needless to say, almost everyone turns to IT when they need "a quick report run" (while we all know that creating custom reports and performing custom data extraction tasks to support incentive compensation management is time-consuming and cost-intensive), and the workload can be staggering.
In addition to strained resources (the eternal mandate to do more with fewer resources), the key EIM issue for IT includes non-IT-related workload. Namely, in many cases, IT staff is called upon to create reports and gather required data for executives, finance teams, and sales organizations, although these service-asking users should be self-sufficient (and should themselves be compensation analysts, instead of leaving that job to IT staffers). Consequently, IT staffers are taken away from IT's core function: maintaining business systems, maximizing the value of technology within the organization, and streamlining efficiencies through innovation.
Logically, given the many types of users in the system, each type requires characteristic dashboards or user interfaces. For example, salespersons should be able to log into their dashboard and see exactly where they stand (in terms of their objectives and goal attainment) this period, this quarter, or this yearor if there are any escalations. They can thereby see commissions earned to date, attainment against quota targets, and even their ranking against peers. And the dashboards should be interactive, since sales representatives might have to drill down to transaction-level detail to see exactly how their commissions were calculated. If they should perceive a problem or have a question, they should then be able to send messages to their manager or the compensation administrator, and track progress as the issue is resolved.
On the other hand, sales managers and senior executives need access to an executive dashboard as a decision support system for team performance and plan effectiveness, whereby security setups would control what they can see. For example, a regional vice-president (VP) of sales should only be able to see information about his or her subordinates. This dashboard should provide real-time information to help managers see how their teams are doing, who is hitting quota and who is lagging, and which products are selling best in each territory.
Managers can also drill down into results for individual sales people and then compare them to the rest of the team. Managers should get graphical analytics too, so that they can see how their team's results compare to various modeled scenarios, for example, which goes back to the strategic level of sales compensation managementgiving managers information in time to make a difference. Sales executives typically use EIM analytics software to analyze sales performance by region, team, product, or channel; examine customer growth; monitor sales incentive costs; and detect trends in business performance. On the other hand, marketing executives use the software to analyze market segments; determine product success by channel or segment; and analyze channel effectiveness.
Last but not least, the administrators' workbench is where the user company can set up the compensation plans, organizational structures, quotas, territories, overrides, draws, and bonuses. The software should give administrators full control to model and manage the entire sales compensation structure, whereby complex compensation plans with sophisticated plan logic are easy to build, since the software abstracts all the code behind. The application should be strong enough to allow administrators to set up multiple models and apply those models to different teams, in virtually no time. Compensation professionals use EIM analytics software to analyze compensation plan effectiveness; understand attainment distributions; and gauge the impact of new incentive programs. Reporting and dashboards also help the finance folks with better control over discounting, cost of sales, accruals, etc.
In summary, using inadequate homegrown systems in environments with large sales forces and complex incentive plans typically results in several pain points:
- incentive plan introduction and change bottlenecks (owing to the lack of scalability and out-of-sync data), leading to delayed new product introductions, or to entering the market without proper incentive support
- lack of credibility with the sales force (owing to high commission data error rates; slow dispute resolution; and lack of reliable, detailed reporting on commission payments)
- lack of insight into plans' effectiveness, and the inability to forecast the impact of proposed plan changes (since manual, non-standardized processes with silo banks of commission plan data cannot accommodate the company's need for such analytics), which makes predicting and tracking commission plan effectiveness for up-selling and cross-selling capacity impossible
- commission over- or under-payments
- high administrative costs
- time wasted reconciling frequent disputes (owing to much of the commission data being entered manually and a lack of automated facility to trace commission transactions)
- lack of traceability and audit trails of incentive transactions, due to manual processes and lack of standardization (with different incentive management processes being used by different groups within the user corporation)
EIM software is thus designed to help businesses gain better financial management over employee incentive payments, while reducing errors, fostering visibility, more effectively motivating workers, and reducing administrative costs.