The Business Case for Incentive Compensation Management

In a fast-changing business climate, outsized gains await organizations that can adapt faster than their competitors. The winners roll out new products, enter new territories, and adopt new strategies. They redeploy resources and adjust on-the-fly because they recognize that opportunities will not wait, and threats will not recede. The commonality in this strategic agility? Business-centric incentive compensation management (ICM).

Today’s organizations need consistent, timely, and dynamic ICM solutions for two primary purposes: to streamline operations and optimize business strategy.

ICM – Strategy

All too infrequently (e.g., yearly), companies will pause to assess the state of their incentive compensation – its costs, alignment with strategic goals, and opportunities for improvement. Based on that assessment, sales executives might redesign their comp plans, adjust variable-comp minimums and maximums, consider various modeling scenarios, and develop budgets and forecasts for revenues and comp expenses. And they’ll communicate all of those parameters to stakeholders and participants.

ICM – Operations

Then it comes time to implement those changed plans – to operationalize the strategy. Regardless of what tool or platform you use, it means you must process payments, issue statements and reports, deal with inquiries and disputes, and manage other administrative matters. At the end of the year, you assess the process – what worked, and what didn’t work – and ensure your activities and process align with your strategy in complementary ways.

The Perfect Moment Never Arrives

How do you know when you’re ready for ICM technology? In our experience at OpenSymmetry, we regularly find that inquiries and disputes from payees are the proverbial “canary in the coal mine.” When you have high or increasing numbers of questions, it likely means your salesforce has questions about the accuracy of your data and results – or simply lacks the visibility into the correct numbers. They can’t see how they’re performing vs. quota or they can’t see their actual and potential payouts if they meet performance goals.

That can present morale problems among sales performers (who can lose confidence in your incentive-comp program and lose time performing “shadow accounting”). It can also present productivity problems in your sales operations and finance teams that experience a significant time drain chasing down errors and answers.

For many organizations, it can be quite tempting to wait for the ideal timing – a nearly mythical period of three to four months when no other major event is disrupting the IT calendar period. Realists know, however, that such a time never really arrives. For a system that delivers a meaningful and measurable ROI, there’s no compelling reason to delay.

Unsurprisingly, many companies initially view ICM from an administrative perspective. They want to increase accuracy and visibility in their calculations, and typically make substantial progress on those fronts, and strengthen the trust between sales operations and the salesforce. However, it would be a mistake to simply view ICM as a multi-user calculation engine. As the accompanying graph shows, usage of ICM is highest in early-stage operational activities, such as plan administration and reporting.

However efforts to derive ICM value drop off when it comes to designing plans, setting quotas, forecasting sales or aligning territories. This is unfortunate, since even greater ROI can be derived from these more strategic activities.

Cost vs. Savings

In the end, the success of an ICM implementation hinges on your ability to build a straightforward business case that leads to a projected ROI by documenting estimates for costs and savings.

Costs

The cost estimates are relatively simple, focusing on two primary inputs: license fees and implementation fees.

• License Fees: Most modern solutions employ a SaaS model, so you pay a “per seat/per month” fee. There can be a few subtleties that you’ll want to iron out: such as renewal periods, adding/subtracting users, and who owns the data when the agreement terminates.
• Implementation: Some low-end systems can provide “guided implementations” where you select from a few parameters. However, more sophisticated ICM systems can, over the long run, benefit from vendor assistance to improve usability, customization, and automation

Savings

From a variety of perspectives, ICM directly brings significant savings to organizations.

• Overpayments – Given the complexity of some comp plans (e.g., accelerators, SPIFs, splits, and other factors), overpayments are an unfortunate reality. The ability to more accurately calculate commissions and curtail overpayments, which some experts peg at 3-8% of total incentive comp, can lead to massive savings.
• Comp-Team Productivity – The work that Sales Operations, IT, and Finance teams put into manually processing and managing ICM creates unacceptably high internal costs. These low-value tasks often lead to employee frustration, resulting in expensive and disruptive turnover.
• Sales-Team Productivity – To be successful, ICM programs must create trust. But when sales teams mistrust comp calculations and payments, they can spend inordinate amounts of time (some estimates suggest as much as 5% of their time) playing “shadow accountant” – instead of selling. Other estimates suggest reps spend 5% of their time simply tracking their commissions, creating a drag on your top line. If that frustration and mistrust hardens, those reps are also at risk of leaving. Lifting sales even just 1% with an accurate and timely platform and targeted, agile comp plans can produce meaningful revenue increases – and happier sales reps.
• Audit Costs – As a major line item in the P&L, sales comp merits ongoing scrutiny. With ICM, automated processes, and best practices, there are fewer exceptions and anomalies. That translates into auditing costs, faster compliance reviews, and easier reporting. You get greater visibility and greater predictability while adhering to regulatory frameworks.

Ultimately, the business case for ICM technology rests on its long-term strategic value – the ability to align business initiatives and sales activities, including targets, quotas, territories, and other business factors while simultaneously providing accuracy and visibility to a broad range of stakeholders.

For a more detailed view of how you can build a robust business case for ICM technology based on a clear ROI, check out Performio’s eBook: “The ROI of ICM.”