April 3, 2011

Drive Competitive Advantage with Improved Sales Incentive Plans

I have had the good fortune over the past couple of years to work with a lot of bright people.  Bruce Jackson here at Varicent is one of them.  He has an incredible wealth of experience in incentive compensation management and I have come to rely on his knowledge, experience and perspective.

He and I spend a bit of time last week talking about how often well-intended changes in compensation - geared towards driving the right behavior, and retaining top talent often end up with the exact opposite affect.  I talked him into co-writing this blog post and wanted to thank him and acknowledge his contribution.
Organizations consistently focus on achieving competitive and sustainable advantage in their markets. Especially during turbulent economic conditions a motivated and effective sales force is a key component in achieving these advantages.  A necessary component to attracting, acquiring, and retaining top producers is the design and implementation of a good sales incentive compensation plan.
Properly designed incentive compensation programs drive the ‘right’ behaviors and reward successful performance.   All too often, as organizations tune their plans; as product offerings expand; as distribution channels overlap; as they respond to a constantly changing economy, organizations find that they end up with increasingly complex plans.  These complexities lead to dissatisfaction with both the people charged with implementation and managing the plans, and the sales organizations who are affected by it.
The key to creating a good plan is selecting a few measures that drive the behavior that an organization needs.  Too many measures do not motivate the sales team – rather it leaves them deciding what to do on their own, which may or may not be in the best interest of the organization.   Too many measures also increases the administrative cost, slows down the process, creates an environment where there are more disputes and inquiries, increases the chances of errors and overall does not drive the performance that everyone is looking for.
The key is not only having just a few measures but ensuring that they are the right ones.   The selection of performance measures, and their impact on incentive payouts, is a critical consideration during the plan design process.

For instance, incentive compensation plans that reward the sales team based upon company growth during a recessive economy leave the sales team feeling disconnected and unmotivated, often resulting in high turnover and the loss of key employees to competitors.   Incentive compensation plans that reward performance based upon metrics that an employee cannot influence leaves the sales team frustrated and demotivated, leading to overall decreased performance.   A common reaction to disruption and the loss of key talent is to implement multiple measures within the incentive compensation plans with the goal of protecting key performers from the impact of a single measure.   As we discussed earlier, this approach is not recommended and often leads to confusion, increased administration costs, and overall dissatisfaction associated with managing the plans.
Identifying and implementing changes to incentive compensation strategies in anticipation of changing economic conditions is a significant challenge facing organizations today.  Many organizations use spreadsheets, antiquated reporting tools and legacy systems to try and analyze the impact of new plans and components.  Relegated to using inappropriate tools combined with an increased need for speed, compensation teams are often unable to provide the type of simulations and informational analytics required to support an agile decision making process.  Trying to just keep up with the most basic changes required herculean efforts on the part of Sales Operations, Human Resources, Information Technology, and Finance departments - who spend countless hours extracting a subset of the required data from source systems (if available), aggregating the data into multiple spreadsheets or ad-hoc databases, and developing complex incentive rules within formulas and macros that are prone to human error.   As a result of this labor-intensive process, it is not uncommon for companies to voice concern that the quality of the results may not be worth the cost of the effort.
Organizations that excel during turbulent times leverage rules-based, real time incentive compensation modeling and scenario simulations using predicted and historical data to anticipate changing conditions and pro-actively introduce industry leading incentive compensation plans.  These next generation sales performance management applications significantly reduce the overall effort required to predict sales force expenditures and provide accurate, auditable results that can be relied upon by key stakeholders involved in the process.  By seeing a clear picture of the results for each performance measure, key stakeholders can select those performance measures that provide the most effective means to motivate the sales force and drive sustainable competitive advantage.

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