Incentive Compensation: Balancing Risk and Reward at Huntington Bancshares

I wrote a while ago about the new imperative for incentive compensation systems in banking (follow this link for that article http://bit.ly/rFlffE.)   That was all about the Federal Reserve and their guidance on Sound Incentive Compensation Policies. 

    

I was happy to see the following video (follow this link for the video http://bit.ly/vfSMwS) on Bankdirector.com.  The video entitled Incentive Compensation Plans: Balancing Risk Vs. Reward features Kevin Blakely, SR VP and Chief Risk Officer of Huntington Bancshares. It runs about 3 1/2 minutes and in it he discusses managing the risk in incentive compensation plans, how to minimize risk taking and the role of the Chief Risk Officer in incentive compensation.  He provides some insights as to how Huntington Bancshares addressed these challenges and manages the risk in incentive compensation.

New Michael Dunne White Paper and Webinar now available

Many organizations are working hard to improve their sales effectiveness.  Increasingly many of these organizations are turning to information technology to help improve the efficiency and effectiveness of their incentive compensation and sales performance management processes.  Many of these organizations are now in varying stages of rolling out Sales Performance Management (SPM) solutions.

During these deployments, organizations go through a number of distinct phases as they mature.  The first phase is to ensure that the processes they have in place are efficient and produce accurate results.  As organizations look 'beyond the numbers' they go through increasingly complex phases ending with business agility and overall SPM optimization. 

I asked Michael Dunne, X-Gartner analyst, and long-time veteran  of sales effectiveness and sales performance management to write a report, outlining these stages of evolution, and to provide some guidance for organizations who find themselves in different levels of  SPM maturity.


The result is a new report which provides great insight as to the evolution of SPM systems within an organization.  This is a must-read for anyone trying to educate themselves on the Sales Performance Management landscape.   I have also asked Michael to discuss this paper and answer any of your questions in a webcast. This is now scheduled for December 6th.

Click to download Michael Dunne whitepaper or to register for webinar Dec. 6th 

6 New SPM Trends - Trend 3 - The Increasing Role of Finance

In a recent survey conducted by CFO Research[1],  CFO's were asked whether the finance function would play an increased role in sales incentive management (including plan design and administration).  While many finance departments are already heavily involved, 52% of the respondents said they will get even more involved over the the next two years.  It’s not surprising to see this interest from Finance.  In times of economic uncertainty, compounded by the concern about negligible revenue growth, many CFOs are seeking opportunities to improve margins.  They are no longer focusing just on cost reduction; rather they want to improve margins by driving sales of the most profitable products and services, not simply by selling more of the high volume offerings.

According to the survey, 61% of the Finance team wants to see ‘more sophisticated selling’ by their sales teams. Sophistication, in the minds of Finance, means encouraging team selling, bundled offerings, multi-year deals, cross selling, and increased selling of high margin products.  They also want to see a tighter link between the setting of quotas and the specific revenue goals of the organization.  It’s frustrating to see the organization make a strategic decision to try and drive business growth in one area, only to find that the sales plans drive a very different behaviour.  Reconciling the plans to the strategies can often take over a year, which results in delayed execution of strategy and missed opportunities.

From a Sales Operations/Human Resources perspective, leading ‘experts’ on incentive compensation plan design are encouraging organizations to simplify plans and make sure that incentive plans have as few measures as possible (often stating that best practice plans have no more than three measures). 

Finance’s drive for more sophistication versus Sales Operations and Human Resources drive for focus and simplification of incentive plans appear to be at odds.   The best resolution is to get ahead of the curve.  This is a great opportunity for all business interests to converge and share their perspectives on the challenges and high priority items for moving forward. 

Successful organizations work with finance to not only agree on the sales plans and drivers but to agree on time-lines, decision making processes, constraints and any potentially conflicting viewpoints on plan design, implementation priorities and targets.  The combined group needs to come to consensus and then communicate their shared goals across the organization.  Failure to do this often leads to different priorities and misaligned goals.   In turn this leads to inconsistent and often conflicting communications being delivered to the sales organization.  A coordinated effort leads to common goals, sales alignment and increased performance.

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[1] Managing Sales Incentive Compensation Amid Uncertainty, CFO Publishing, March 2010

My perspective on CSO INSIGHTS 2011 Sales Compensation and Performance Management – Key Trends Survey

 

Jim Dickie and Barry Trailer of CSO INSIGHTS do a great job every year of taking the pulse of sales leaders and sharing their survey results and opinions.  The 2011 Sales Compensation and Performance Management – Key Trends survey is another good read from Jim and Barry, and as we have come to expect, their insights and observations add a lot of value to the raw results.  

A copy of the survey results is available at   http://bit.ly/pbvNHG

As I was preparing for a conference presentation next month, I was re-reading the results and I was struck by one chart in particular.  When the question was asked – What aspects of your comp plan would you change, and in what order?   

The top three results were

• Management’s ability to judge plan effectiveness
• Management's visibility into sales performance
• Ability to model plan revisions

The bottom three, in terms of priorities were

• Managing credits, exceptions and adjustments
• Minimize inquiries and disputes
• Support compliance requirements

The complete list is good, and I am sure that anybody reviewing it could not disagree with it as a whole.  This list however, represents the perspective of sales leaders as it relates to compensation.  I wonder, if we asked CFOs, Compensation Teams, and HR leaders how they feel, would we get the same list and the same priorities.  My hunch is that while other groups wouldn’t disagree with any of the requested changes, they believe that the fast and accurate payment of commissions, and minimizing inquiries and disputes will increase sales job satisfaction and give the sales team more time to sell by reducing their administrative effort and shadow accounting efforts.  This could be argued as one of the biggest benefits of automating the commissions management process and therefore made the top priority for the compensation team.

I have often talked about the need for cross-functional organization alignment, around goals and priorities when implementing a Sales Performance Management System.  If the cross-functional team isn’t aligned as to what the short and long term goals and objectives are, then the projects are in risk of cost and time overruns and missing expectations of some group when it is delivered.   What this chart got me thinking is that it’s not enough to make sure that the list of goals is correct, but also that they are prioritized and agreed upon by the whole team.   Getting alignment from the start will save everyone a lot of time and effort in the long run.

Conference highlights - WorldatWork Spotlight on Sales Compensation

For the second year in a row the WorldatWork’s Spotlight on Sales Compensation event was a sell-out and a great success.  Approximately 300 people congregated at the Westin in Chicago to discuss sales compensation.  Most of the people I talked to came with one of two things on their minds.  How do we improve the compensation plan design?  Or how do I better leverage information technology to improve efficiency in the compensation management processes?

The who’s who of sales compensation showed up and presented their latest thinking on managing the sales compensation and commissions processes.  Attendees got to hear from many speakers including practitioners  from organizations like Salesforce.com, Manpower Group, American Express,  and Office Depot.  We also were able to from hear thought leaders from organizations including Towers Watson, Coletti-Fiss, Sibson Consulting, BetterSalesComp and the Cynal Group.

As readers of this blog will know, I have been out collecting  ‘keys to success’ from project managers of incentive compensation systems.  I have collected a ‘top 10’ list over time and I was asked to share the findings of these interviews.   I was fortunate by be joined by Vivian Adashek of Manpower, and we jointly presented - Keys to Success in implementing a Sales Performance Management Solution on Thursday afternoon.  Manpower has been using an automated solution for a few years now and Vivian gave some great advice for new project managers.  We also had a interactive group which made the session that much more enjoyable.

Some of the Keys I have blogged about before, but a new one has hit the top 10 recently.  It’s all about understanding the policies, processes and procedures that surround the commissions management process - before you start doing things.  Vivian found, and others agree,  that when a project team first assembles on the project,  that they have a general understanding of the compensation processes but this is not enough.  The challenges that arose during software selection, implementation and roll-out were often caused by the fact  that they did not understand the commissions process at a deep enough level, and this lack of knowledge tripped them up several times.  I too have seen this on a few of the projects that we have worked on.   Managing compensation is a complex process that has often been patched, pulled and changed to meet a myriad of changing requirements over the years.  Fully understanding what truly happens along the entire process is key before you start the automation project.  Ignoring this often leads to delays in the project plan, frustration for the team members, and cost overruns that could have been avoided.

I know that there is always the desire to jump right in, and start developing with the new software, but take the time to make sure you document and fully understand how sales compensation in done today and a very detailed level.  This up front effort will save you lots of time and money over the course of the project.

If you want a copy of the presentation, or have suggestions for the top ten list, or other questions and comments about commission management software please let me know.  

New Presentation for Spotlight on Sales Compensation in Chicago

I have been asked to present on Keys to Success when implementing a Sales Performance Management System at the upcoming WorldatWork Spotlight on Sales Compensation in Chicago (August 24-26).  I have been fortunate that over the years I have met a lot of very successful people who have done just that.  I have collected a lot of their advice and rolled it into a top 10 list.   For WorldatWork’s conference this year I will be joined by Vivian Adashek who will be talking about their implementation at Manpower.  She is a joy to work with, and brings some great experiences and practical advice for any new project manager.  Anyone starting on the SPM journey will be well served by listening to what Vivian has to say.

Specifically, we’ll be covering issues such as:

• Ensuring all functional areas are aligned to the same goals
• Key considerations for reporting
• Things to consider for testing, history tracking and data integration
• Role of Information Technology groups

Please comment or share this post. If you have advice for new project managers please share them, and I will continue to add to the list and make it available.  If you have questions feel free to post them as well and we will try to help.

If you’re attending WorldatWork’s Spotlight on Sales Compensation conference, please visit us at exhibit #7 and attend our workshop (Workshop Code: C15TH4) on Thursday, August 25^that 4:15pm.

Contact Paul Peters at 647.260.1556 or ppeters@varicent.com to set up a meeting while we’re there. We value your feedback and insights.

SPM Keys to Success - Advice from Hertz

It’s always great when someone who has gone through the trials and tribulations of implementing an enterprise software application are willing to share their experiences.   I had the great pleasure of talking with, and then presenting with Lynn Ferrara, Senior Director of Global Compensation for Hertz at WorldatWork's annual TotalRewards conference in San Diego this week.  Lynn has just come through a roll-out of a new SPM solution across multiple business units for Hertz.  

Today's session  focused on providing some guidance for organizations who are just starting out on the Sales Performance Management journey.  As is often the case when I have these conversations I found her insight invaluable.  

 Lynn's advice can be summed up in four key points:

Reduce and Improve Reporting – I blogged about this earlier, but Lynn echoes the need to create mock-ups of the reports that you plan to produce and run them by your end-users.  Her advice to project managers is to do this early, at the very outset of the project.   In the end, it’s the reports that contain the value for management – you must make sure that the reports you design provide the value desired.  Lynn also advises that just automating the reports you have today, will often not meet the requirements of management.  If this is done early in the project, any mis-alignments are identified while there is time to adjust the project plan.  Agreeing on reports creates alignment, avoids disappointment, delays and cost-overruns later in the project. 

Allow Enough Time for Data Integration - different reporting systems can provide data on different time tables (i.e. Weekly versus monthly), in different currencies, converted at different rates, and from disparate manual systems.  Working to get a common, reliable set of input data often takes going back to source providers and working creating new or different extracts, schedules and formats.   This activity usually takes longer than most team allow.  

Consider Testing Requirements Early – when implementing a new system, you have to consider that a lot of things can change in the compensation system that will make testing a challenge.  One common example is that the source data has been updated since the compensation data was calculated.  This happens as people make corrections and adjustments to source data when errors are discovered downstream.  For most organizations it is nearly impossible to track all of the data changes to the source data.  This means that that data that was used to calculate sales compensation in the old system is different than the source data for the new system.   Add, manual overrides, currency fluctuation, errors in the current systems and processes and other data inconsistencies, and it is virtually impossible to come up with exact the same commission results for from the old and new system.  At the outset of the project, teams are well advised to think through a testing plan thoroughly, and setting realistic expectations.

Communicate, Communicate, Communicate – there are many interested parties when a new incentive compensation management system is implemented.  Constant communication with the payees, Information Technology groups, the executive team, Sales Management and the plan administrators are all key to ensure success in a Sales Performance Management system.  Lynn advises that project managers should allot more time to communications across the groups in order to both train them on the new system, but also sell the solution that you are building.

  

Again I want to thank Lynn for taking the time to share her thoughts with the SPM community.

Life, Liberty and the Pursuit of Sound Plan Design

 

At INSIGHT11 in Boston this week, Brandon Kulik from Deloitte’s Sales Effectiveness/Human Capital Management practice presented his thoughts on integrating administrative and technology functions into the sales compensation plan design process. 

He suggests that the plan design process is multi-functional, highly visible, business impacting, and yet for a lot of organizations it leaves out critical players who can ensure its success.  Two of the most critical and sometimes overlooked players include those who are responsible for administering the plans and those who provide the data and upstream systems which are part of the overall commissions management process.  

All too often sales teams design plans with the best of intentions, but without input from compensation administration and information technology groups.  Without their involvement in the design process it’s hard to determine the practicality, cost and time involved in implementing their ideas. For example, if the data required to calculate commissions for a new plan doesn’t exist then the plan needs to be reconsidered, or the time to implement extended so that the data can be sourced from new or different systems.  It is much better to know this early when there is time to adjust, rather than figure it out after the new plans have been communicated to the sales team.

Another key point of Brandon’s talk was that the compensation administration and information technology groups bring a detailed understanding of the way things work today.   Many new plan concepts are designed and work at a general level, but confusion and mis-interpretation creep in where there are exceptions, unique cases and the like.  There is a need for absolute clarity on how the rules should be interpreted and managed in every scenario.  Making sure everyone understands this, can significantly reduce delays, errors and significant cost and wasted effort further down the road. 

Two other key considerations to ensure a more effective plan design process are to ensure that there is a governance process that formalizes the involvement of the compensation administration and information technology groups to ensure that this involvement is not ad hoc or convenient, but rather part of the standard processes by which the organization operates.  The other was to leverage modern sales performance management solutions to aid in the analysis, implementation, communication, roll-out and eventual success of the new plans.  Relying on legacy systems, manual processes and spreadsheet based systems will not allow organizations to efficiently and effectively design, implement and roll-out new plans at the speed of business today.

If you have any comments or follow–up questions please post them here or contact Brandon directly at bkulik@deloitte.com

Look for more than improved efficiency when implementing a Sales Performance Management System

I am often asked about the drivers of Sales Performance Management projects.  What specifically are organizations looking to accomplish?    How do they determine the Return on Investment (ROI) on their Sales Performance Management initiative?  What are the first priorities?

While every organization is unique and they each have their own challenges, perspectives and priorities there are three categories of benefits that are common across Sales Performance Management projects. 

They are:

·      Efficiency gains

·      Business enablement

·      Reduced risk

One of these goals normally takes precedence over the others and tends to get most of the focus from project teams.  Organizations are well-advised to look at the opportunity for business gains across all three drivers.  

Efficiency Gains

Organizations often start projects with the goal of looking for efficiency gains.  The pains associated with high commission error rates, delays in processing times, and significant effort and administrative burden are tangible and it is relatively easy to quantify the benefit of gaining improvements in this area.

Improved efficiency is about doing more with less.  The expected gains are in area of reducing the time and effort it takes to process and manage commissions, quotas, roster and territories.  Reducing effort to maintain the current systems, reducing the number of days to process month ends, reducing errors rates in commissions are all common themes.  This makes a lot of sense as industry analysts cite that organizations implementing a Sales Performance Management System (SPM) can reduce the administrative and IT staffing effort by more than fifty percent.  They can also expect to reduce incentive compensation calculation errors by over ninety percent.   Organizations looking for a hard ROI can generally find find ample evidence of organizations than have had major successes in processing efficiency.

Business Enablement

The second area of benefit that most organizations find is in enabling the business to do something that was previously too impractical if not impossible to do.  Many organizations are unable to implement certain types of components in their plans as their current systems, processes and technology preclude them from doing what they want.  Common examples include implementing margin-based versus revenue-based plans, introducing quarterly SPIFs, and incentives to drive certain packages or bundled offerings.   Being able to adjust to market shifts and implement changes quickly can help organizations take advantage of new market opportunities and react to other market shfts quickly.  The overall result is that incentive compensation plans drive the desired sales behavior and help with organizational alignment.   The inability to do this has long been the frustration of many sales leaders.   Modern SPM systems provide sales leaders with the speed and flexibility to drive the sales organization the way they want, ultimately driving increased revenue, increased margins, and increased organizational alignment.

 

Risk Reduction

The third driver of interest in Sales Performance Management software is risk reduction.  According to the respected analyst firm Gartner, approximately ninety percent of organizations with over one hundred sales reps are using home-grown or spreadsheet based solutions to manage incentive compensation.   While these 'systems' lead to many of the inefficiencies and create roadblocks to improved effectiveness that I referred to earlier, it is often the case that there is a compliance or audit driver that is behind putting in a new Sales Performance Management software solution. 

From a compliance viewpoint the challenge is to provide a holistic view of commissions from an overall view down to individual performance.  Increased checks and balances, multiple approval levels, tracking down exceptions and other compliance requirements tend to put a burden on home-grown and spreadsheet based systems that slow them down and create more rigidity - exactly the opposite of what is required.     Modern Sales Performance Management solutions provide built-in complete audit trails, plan approvals, dispute resolution and compressive reporting on exactly how and when territories, quotas, plans and commissions were changed.   For many organizations this increased visibility replaces error prone and time consuming email chains and voice mails.  Payees appreciate the clear and consistent view of their commissions, administrators save significant time and effort tracking down reasons for adjustments, and sales compensation administrators are much better prepared for both external and internal audit and compliance requirements.