Have you been burned by inaccurate quota calculations? Have you felt the heat after approving an incentive adjustment? Are your sales reps fired up (in a good way) when sales comp payouts go out on time with 100% accuracy?

Designing an effective sales compensation plan is critical to the success of a sales organization. Equally important, but often overlooked, is investing in the right level of resources (people, process, technology, data) to effectively administer and manage sales compensation operations. This includes activities such as setting quotas, adjusting quotas, calculating sales credit, managing exceptions and adjustments, and determining accurate, incentive payouts.

Scott

I had the opportunity to interview two, sales compensation experts: Scott Barton and Mike Meisenheimer to get their input on sales comp operations and administration. Scott and Mike have worked as sales compensation consultants for the last 15 years and recently started their own firm. (Learn more on salescompinsights.com)

Here are my 5 burning questions about sales compensation administration:

1) Scott, Mike…Let’s start with one of my favorite topics, sales quotas. A sales ops peer recently stated, “Calculating accurate sales quotas IS like rocket science”. Do you agree? What do you feel are the keys to setting accurate quotas?

Mike

Managing effective quotas is certainly a thought-provoking topic.   A lot of companies struggle with this, especially when you have market conditions that many industries experienced over the past two years.

Companies that do a good job sustaining what their salespeople believe are reasonable quotas usually have good intelligence about their markets.  Certain variables, such as demographics, legislative trends, competitive activity, sales history, can all play a role in quota setting.  It’s not unlike how analysts price a company’s stock – just at a more micro level.

Many companies don’t use quotas, because they understand how much of each sale they can pay to the salesperson.  The risk of this approach is, over time, the salesperson can become too comfortable financially and complacent professionally.  There’s no motivation to continue growing the business.  In the company’s early stages though, it’s the salesperson that carries most of the risk, a risk offset by the reward opportunity of hitting it big.

About any approach can be effective when management ties it to a philosophy, specific policy, and a communication campaign.

2) Continuing on the topic of quotas, how transparent should the quota methodology be? Should we tell salespeople exactly how we calculate their quotas or should we provide a high level overview? Why?

Salespeople generally respond well to transparency – most people do in fact.  The exception is when the quota-setting methodology becomes so complex that it’s hard for anyone but the analysts to understand what’s going on.  Some salespeople will spend their precious sales time trying to understand and account for the variables, others will suspect management is trying to get one over on them.

To a certain degree, salespeople should understand what makes up their number.  It helps them to know where to focus, and increases their line of sight between the company’s success and their own.

That said, we’ve seen plenty of instances where management says to the salespeople nothing more than, “you’ve got to grow by x% — that’s just the way it is.”  And this works, because, over time, enough of the sales team hits or exceeds quota and therefore believes in the number, and those who don’t are motivated by their peers’ success to keep at it.

3) Let’s discuss adjustments, disputes and when to give a salesperson credit, outside of the standard policy or plan…. Who should approve these? What process should we use?

This is one of those areas where “it depends.”  Philosophically we are not opposed to exception based crediting.   However, there should be very clear guidelines for when an exception will be approved and a clear process for both submitters and approvers.

This is an area where technology can help.  Workflow solutions that are linked to incentive reporting allow salespeople to electronically submit questions or requests.  Depending on the type and size of the requested adjustment, appropriate team members can then take the right actions – research, approve, deny, forward, escalate etc.  We’re not so hung up on the “who” makes adjustments as we are that the process is documented and communicated.

4) The administration of sales compensation plans is extremely complex, yet many companies (even the big guys) are still doing everything on Excel spreadsheets. Why do you think that is? When will comp software become as popular as CRM software?

Depending on which survey you read, as many as 80%+ of companies are still on Excel or another desktop application.   You certainly see higher penetration rates in certain industries, but as an application space there just hasn’t been the kind of ramp you saw with CRM.  We have a few hypotheses about why this is the case.

Number one, sales compensation can be very complex.  As a result, these systems have to be very flexible and easy to configure.  For many companies Excel/Access has been easier to use.Second, implementing a packaged sales performance management solution can be expensive.  When you have one or two people, regardless of how painful it is, managing the compensation program it can be difficult to justify a hard dollar expense.

Number three, for many companies it is about the data.   Our own surveys on this topic have consistently shown that data problems rank in the top one or two challenges faced by companies over the years.  New software in and of itself doesn’t fix data. Fourth, and this may be the biggest inhibitor, is that for many companies the process may be incredibly painful, but it still works.  The checks are (mostly) accurate and they go out on time.  From the executive suite there may be limited justification to change.

Now, offsetting these inhibitors are some recent changes in the market.  Interestingly, the number of vendors continue to grow.  Right now we’re tracking approximately 30 solution providers.  So, clearly those companies, as well as their investors, continue to see opportunity in the market.   In general, the solutions are getting easier to use.  In particular, we’re seeing increased adoption in the mid-market through Software-as-a-Service (SaaS).

Will it ever take off like CRM? We are not sure, but we do see increased momentum in the space.

5) How does a company know if they have invested in the right level of sales compensation administration resources?  What are the symptoms of lack of resources?

To help answer this question we typically work with our clients to define the mission and operating priorities for the compensation administration team.  We look at administration related criteria such as process effectiveness, flexibility, deliverable quality, available functionality (e.g., quality of field reporting) and alignment with other business priorities.

From a resource perspective, we like to use the ratio of salespeople to administration FTE.  Across industries, the ratio tends to be roughly 250 salespeople per FTE.

Some of the key symptoms that might make you question whether you’ve made the right level of administration investment can include: 1) Increased turnover within the administration team; 2) Decreasing or low accuracy rates; 3) Payout timelines that are above the industry average; 4) Lots of field “noise” in the system; 5) Inability to respond to plan change requests; and/or 6) Lack of quality reporting or analytics.

If you enjoyed this post, check out “Time to Transform the Incentive Management Function” on Scott and Mike’s Sales Comp Insights blog.

How does your organization handle incentive compensation administration? What challenges do you experience? What advice do you have? Please add your comments…