Where should Sales Compensation sit on the Finance agenda and why is it important as a strategic tool?
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Blog post by: Anthony Hutchins, CEO, OpenSymmetry
Whilst I think we can all agree that Sales Compensation is important as a strategic lever for a business, the real question is how many companies are using it strategically? We are not just talking about the design of comp plans, but the operations that support it – and, particularly at a time where the use of incentives in an organization is growing.
To understand the significance, you must look at the amount that your company spends – i.e. how much of the P&L expense does it represent?
According to Alexander Group, the benchmark for Cash-based Compensation (salary and incentives) for the Sales Team is approximately 7.9% of revenues; however, that number can be much higher depending on the industry and the type of product(s) being sold.
Regardless of the level of spend on sales compensation, it is critical to ensure you are getting ROI from it. To use sales comp strategically, you should be driving the sales’ team behavior in a way that is aligned with your strategic corporate objectives – this gives you speed to market and the ability to be agile in your business strategies.
Clearly, attainment of revenue targets and predictability in revenue are directly impacted by the performance of the sales organization. A highly motivated and aligned salesforce, translates into more predictable revenue and top line growth. However, just 37% of sales reps’ time is spent on revenue generating activity.
The question we would ask, is what would it mean to your business to provide sales reps with more time to sell instead of handling the administrative work, data entry, shadow accounting, and other non-revenue generating operational activities?
Most companies today, in fact 90% of the top performing companies, utilize incentive programs to reward Sales. And if properly structured, incentive plans can increase employee performance by 44%. Yet 62% of companies continue to leverage manual processes and excel.
From an Accounting perspective, you care about:
(1) speed to close, and accuracy of the expense for GAAP compliance
(2) ability to analyze the effectiveness of commissions
(3) transparency to the sales team
(4) auditability when calculated outside of Accounting
Given the amount of total revenue being managed in the sales compensation process, most executives are astonished by the lack of controls on such a large number. This potentially exposes their organization to manual errors in payments, financial statement misstatements, lack of transparency, and the risk of legal recourse through non-compliance – particularly in regulated industries.
What is the cost of getting it wrong?
The stakes are high! Apparently, 43% of sales reps would leave their org for a 10% salary increase; and 58% of employees that left their last job say pay was a motivating factor.
Meanwhile, the cost of an effective salesperson leaving an organization has been measured as anywhere between $300k-$500k. This is based on cost to rehire, time to train, build pipeline, loss of revenue, etc. Conversely, the cost of retaining poor performers, can be similarly high.
Last year, what we observed was that attrition levels were at a low compared to other years. (Not surprising in a pandemic when people were nervous about staying employed.) However, with growing confidence in the economy, we are seeing levels increase and a lot more movement in the job markets.
Companies need insight into their sales team’s performance to be successful.
How are these SPM technology tools giving CFO’s visibility to driving behaviour and ROI for sales comp?
Companies have been reacting to new market conditions, pivoting sales strategies, adjusting quotas and territories, and communicating new plans. The companies that have been doing this most effectively use Sales Performance Management (SPM) technology, and that’s why we believe it’s important to invest in this area to stay ahead of your competition.
However, one of the challenges today is the plethora of technologies available to businesses, but particularly, those that support the sales and revenue operations functions. The average number of tools that support sales and related operational processes, is 9, and in some businesses, it is more. It is no wonder that there is less time spent on actual revenue generation activity.
That said, when looking at addressing the challenges around Sales Comp and Sales Performance Management there are some specific technologies and capabilities that are critical for businesses today.
OpenSymmetry define the core set of SPM capabilities as:
- Incentive Compensation Management
- Territory Planning & Management
- Quota Modeling & Assignment
- Planning & Analytics
Incentive Compensation Management:
These platforms provide the ability to implement, calculate, model and clearly communicate a range of sales plans that align revenue, profitability, and customer goals.
Territory Planning & Management:
Territories need to be defined, optimized and quotas adjusted, often on a frequent basis.
Some questions to ask yourself:
- Are your territories adequately covered?
- Can you easily realign territories based on changes to the sales team or business model?
- Territory crediting – how many people get credit for a deal in each territory?
Quota Modelling & Assignment
Last year, 64% of organizations reported quota setting as a major challenge.
Some questions to ask yourself:
- Do you know if your organization has a quota gap?
- Have you assigned the right quotas by rep, product, account, geography?
- How have those quotas been modeled? Top-down, bottom up, through collaboration with the sales team?
Planning & Analytics
The data within an SPM system is unique. It is the richest and cleanest set of information about sales performance anywhere in an organization. It can be used in business plans, modeling scenarios for budgeting, provide accurate forecasts; and can tell you:
- If you are achieving ROI on your compensation spend?
- Are your plans performing as expected and driving the right behavior?
- Can you identify outliers, top and bottom performers?
If you look across the spectrum of the various SPM vendors, they are connecting processes across the front and back offices:
- Revenue Forecasting, Sales Compensation, Quota and Territory planning all linked across the same technology suites and utilizing connected data
- Companies like SAP, Varicent and Oracle have a range of best-in-class technologies aimed at streamlining operations while enhancing Customer Experience
- Companies like Anaplan takes a slightly different approach, providing a single platform for a seamless Connected Planning experience around a common set of data
One final trend is that all these technologies are starting to incorporate AI capabilities to provide even more meaningful insights and optimize operations.
What current trends do you see impacting Sales Performance Management for organizations?
In 2020, Sales leaders reported the disconnect between Sales Reps and company management as a major issue. In addition, we think the rise of the Chief Revenue Officer (CRO) brings an exciting new dynamic. This role is taking on hybrid teams responsible for all aspects of revenue generation: Sales, Marketing, and Services, and the operations that underpin them. But it also brings more complexity because these roles weren’t necessarily previously on variable comp plans, and are now being incented on profitability or customer related metrics.
Our prediction is that compensation plans will start to have less focus on pure transactional business, but there will be an increase in overall cash incentives being paid out, potentially adjusting the mix with base salaries.
What advice can we give to organizations on how get started on the journey?
First off, all organizations start from a different point or level of capability. One of the things OpenSymmetry has produced is a SPM Maturity Model that lays out different levels of capabilities for organizations as they go through a SPM journey or transformation.
Of course, not all companies necessarily need (or want) to be at the most advanced point of the Maturity Curve, but making incremental improvements to your operations can have a major impact in increasing revenue, reducing cost, and reducing risk.
Paving the way forward:
Go back into your businesses and ask some simple questions:
To Sales Leaders…
Are your sellers shadow accounting due to insufficient commission/performance reporting?
Are you spending more time reconciling or validating that your payments are correct, rather than analyzing whether your plans are effective?
To Finance or Sales…
Do you leverage historical data to assess success of plan changes or when you are designing new ones?
Take the responses to these questions, prioritize the areas you see as potential for improvement, and set yourself some realistic goals to address them. I am confident the rewards will be significant.