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Incentive Compensation Plan

Acquiring, retaining and motivating the right talent continues to top the list of challenges identified by CFOs and other C-Suite executives at companies of all sizes. Incentive compensation plans that miss the mark can damage any company’s profitability, and even put the future of a company at risk. Yet, despite with the availability of data to better understand the behaviors of customers and those tasked with engaging and managing them, incentive compensation design and management still often fails to get its due.

How can companies define and manage incentive compensation plans that engage and inspire the talent they need to create and maintain competitive advantage? I was fortunate to find out exactly how companies can make it happen when I recently moderated a webinar, The Science of Incentive Compensation Programs: The DNA of What Works, which featured Erik W. Charles, Principal Incentives Strategist, Xactly.

Erik defined the exact DNA of a world-class incentive compensation process based on extensive research of incentive compensation plans on 9 years of empirical data, gather from over 700 companies, who leverage over 35,000 unique plan designs, and his over 20 years’ experience in sales operations, as a sales manager, and delivering his subject matter expertise in the arena of sales effectiveness software solutions.  Erik shared that there are 4 main pillars that define the anatomy of a world-class incentive compensation process: strategic planning and design, calculation and accuracy, control and risk management, and analytics, reporting and communication. Erik also took a deep dive into each main DNA omponent by discussing the sub-anatomy of each as illustrated directly below:

Incentive Compensation DNA

 

When I asked Eric to reveal the biggest mistake, challenge or opportunity relative to each DNA pillar he shared the following ,to which I have done my best to paraphrase and add color:

Strategic Planning and Design- A common mistake is made when sales quotas are set and are not backed up by data, whether that data be the past performance of sales reps or market intelligence concerning the number and size of deals closed in the relevant addressable market(s). For example, if a company’s strategic plans call for the sale of 100 units and your current sales reps have at best have sold 50 units during the releavnt time frame in the past, have not never quoted 100 units in aggregate, and market data shows the addressable market is 75 units, then you have a problem.  Companies need to understand what their sales reps aare able to accomplish is based on the current assets available to them to leverage in closing deals. Not listening to your data, and only listening to your gut in setting sales quotas is dangerous at best .

Calculations & Accuracy- 85% of companies use Excel, Access or home grown tools as the main tool in performing sales compensation plan related calculations. Incentive compensation calculation engines have existed since the 1990’s, and with the growth in cloud-based solutions, it is hard to even imagine that a cost effective automation solution does not exist for any size company. Companies should use a solution that was specifically designed for incentive compensation plan calculations.

Control & Risk Management- E-mail can be your enemy on several fronts, especially when you go begging for information needed from plan participants,  those involved in managing calculations,  and those involved in approving and making compensation plan related payments.  Any calculations done in Excel create a risk exposure, MarketWatch recently reported that 88% of spreadsheets contain errors. Based on his experience relative to incentive compensation plan related calculations done in Excel, Erik conveyed that he believes the percentage is actually much closer to 100%. Other incentive plan  risk exposures include any manual plan design or payment adjustments made based on a piece of paper, and any other actios taken that do not leave a clear audit trail.

Analytics, reporting and communication- Speak early and speak often. Companies need to get relevant information to their sales representatives and senior management in real-time if possible.  Sales representatives like to know where they stand in real-time. Visibility mitigates or eliminates the time that the best sales representatives spend creating and maintaining their own spreadsheets to track their success, or lack thereof. Senior management needs to be able to monitor exactly how the company’s incentive compensation investment is performing.

Retaining and motivating the right talent drives competitive advantage in any market. You can learn much more about what it takes for your company to engage and inspire the talent your company needs to be a market leader by listening to The Science of Incentive Compensation Programs: The DNA of What Works webinar recording.

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