Early in my marketing career as a creative marketer at Jones Soda Co. (a boutique soda company in Seattle made famous by its novelty flavors and fan pictures on bottle labels), I was fortunate enough to have a mentor that taught me some profound marketing values that still guide me today. One of my favorites was, "People buy products, but they pay for brands." Maybe that's why we were able to successfully market and sell things like Turkey and Gravy in a bottle 😆.
But, in all seriousness, there's a lot packed into that simple statement. This challenged us in our marketing to always be disruptive, with value in mind. Warren Buffet said, "Price is what you pay. Value is what you get." During challenging economic times, there's one seat in the organization that is sure to ensure teams aren't simply cutting costs, but efficiently auditing the value of everything they purchase. Savvy CFOs have this practice dialed in. In this blog we'll explore six different categories to evaluate, well, value.
After a long-sustained runway of growth, a lot of c-suite executives are facing something they haven’t experienced in over a decade, the ever-dreaded recession. During times like this Chief Financial Officers are often in the hot seat and tasked with cutting costs, driving efficiencies, and making very difficult decisions to weather the storm. We can imagine that on more than one occasion they get to a tipping point and simply wish Staples infamous “easy” button actually existed. But CFOs are realists, and know the only way out is through. But how you get through is the trick. Savvy CFOs concentrate on driving value out of every expenditure and is as close to an easy button anyone will find during challenging economic times.
In 2023, virtually every business sector is struggling in an era of paradoxically stubborn inflation, lofty interest rates, and record-low unemployment. Companies are doubling down on their efforts to rein in costs and wring out new efficiencies, and they are giving extra scrutiny to capital investments and operating expenses.
In the executive suite, that’s leading to some understandable hesitation. Many leaders are adopting a wait-and-see approach, looking for more data points and pondering their options before acting. Of course, when buyers slow-walk their purchase and investment decisions, the ripple effect throughout the supply chain can get amplified.
What about business growth? For smaller companies, the mantra has shifted. It’s no longer “grow, grow, grow.” Instead, profit margins, cash flow, and burn rate are the driving factors. Investors are asking if you’re poised to grow into your cost base in months – or years? How can you shorten that time horizon?
Above All Else: Value
Quite simply, value has become the non-negotiable requirement for companies as they lean into adverse business conditions. The reasons are simple, but powerful:
- Risk – In the downturn of 2023, businesses might not be completely “risk off” – but investment decisions are undergoing rigorous scrutiny at the highest levels.
- ROI – To weather the storm, companies want investments that ensure a meaningful and measurable return on their money with a lower total cost of ownership. Now’s not the time for speculative innovation, lengthy implementations, and disrupted processes. Instead, businesses want to pursue strategies that deliver a financial cushion with a high probability of success.
- Expense Reduction – New investments have to address the costs that ballooned during growth periods. Companies want to recalibrate their expenses to align them properly with more realistic (and retrenched) revenue assumptions.
Where will that value come from? Despite the difficult economic landscape, many businesses are increasingly eyeing investments in incentive compensation management (ICM) as an appealing strategy. That’s because ICM can deliver tactical and strategic value.
Strategic Value: Consistency
Today, companies don’t have the luxury of tolerating variability and surprises in their financial results. Investors are unforgiving of unexpected variances that affect the company’s performance.
To be sure, if commissions are only 1% of revenue, a 50% variance in your forecast of that expense means only a .5% increase in costs – not a significant concern in most instances. However, in some industry sectors, compensation expenses comprise as much as 20% of revenue, which means unplanned variances can have major implications.
Strategic Value: Visibility
An automated, streamlined ICM solution can also immediately surface some of the lurking anomalies that can derail your financials. For instance, it can be tempting to look at the current period’s topline revenue and apply a basic rule-of-thumb percentage to estimate the commission expense for that revenue. However, with today’s complex comp plans – think bonuses, spifs, and accelerators – that may not be true. If a few top performers are bringing in a disproportionately high number of sales contracts, thereby earning higher commissions, the cost of sales may be higher than forecast. Knowing that well in advance of the period-end allows you to make appropriate adjustments to forecasts and operating plans and create the consistent performance that the board and investors demand.
Strategic Value: Credibility
One of the most important goals for any CFO is to maintain credibility with the board. That happens when the numbers you present are always correct and lacking any of the surprises. When you put an income statement in front of the board – monthly, quarterly, or annually – you want that to be set in stone. If variances emerge in your compensation expenses that force you to issue restatements, you lose valuable credibility. If that happens with any frequency, you could be looking for a new job.
What’s more, your credibility is also viewed through a process lens. If you’re unable to generate and issue basic financial statements in a timely manner – because you’re trapped in spreadsheets and manual processes – you can end up recording reserves for sales comp that may or may not prove to be accurate. The lack of an ICM system can create unacceptable and needless risks.
Operational Value: Cost Savings
Ineffective and inefficient incentive comp can mask lurking expenses that create a drag on earnings – for example, auditing. One of our customers was previously spending hundreds of thousands of dollars in audit expenses. Since big line-items attract attention from auditors, compensation expense is frequently a point of emphasis during audits. When incentive comp is trapped in fragile spreadsheets, the careful and methodical auditing process can take days or weeks, driving much higher costs. With ICM, you can generate details in minutes and answer an auditors questions fully, accurately, and quickly. The added benefit: auditors grow more comfortable with your systems and controls.
Few would contest that any business process that’s dependent on spreadsheets is susceptible to errors – known and unknown, seen and unseen. In fact, experts believe that 3-4% of the total commission spend is mistakenly spent in overpayments. Of course, ICM has long demonstrated its value in its ability to bring pinpoint accuracy to the notoriously complex world of commissions calculations. That vigilance has never been more important now that the global economy is teetering on the edge of a recession.
The automation of incentive comp is also understood from the perspective of labor usage. ICM can free up significant staff time. That not only saves the company money, it enables finance teams to rise above spreadsheet drudgery (improving their job satisfaction) and devote their talents to higher-value goals. When you’re not tied down for days or weeks with fragile spreadsheets, you’re free to develop new comp-plan designs, model different scenarios, redraw territories, and other strategic activities.
Operational Value: Transparency
Transparency is an important characteristic of strong and successful teams. It’s the heart of a company’s culture, serving as the basis of trust, positivity, and motivation. That’s particularly true with all of the key stakeholders in compensation.
Start with the front-line sales reps. If a high-performing sales rep gains a clear understanding of their comp plan – that is, a plan that’s completely transparent about quotas, commissions, accelerators, and other factors – they will direct their activities, decisions, and efforts to maximize company revenue and their personal income. With a well-designed comp plan, transparency and accuracy benefit all stakeholders.
Consider the opposite: a comp plan that’s needlessly complex and opaque. First, in all likelihood, that same sales rep will miss out on potential earnings because the motivation will be missing or they are unclear on the expectations and measures. They will disengage and decommit from goals because they don’t have a clear picture of the outcomes.
What’s more, complex plans can lead to calculation errors, eroding the rep’s trust in your plan. That leads to “shadow accounting” where the rep wastes valuable selling time by choosing to create and maintain their own spreadsheets and commission calculations because they don’t see the transparency in the plan and don’t trust the calculations and commission statements that are provided. They look for errors in account assignments, data entry, and calculations instead of devoting their time to revenue-generating activities.
Instead, transparency creates value by improving the ability to recruit and retain the top performers. All the cards are on the table, everyone knows their roles, and everyone knows what the performance incentives and rewards will be.
For the RevOps team, transparency creates value as well. When RevOps trusts their ICM processes and tools, they are freed from a tactical task and can spend their time on optimizing sales plans, refining lead-sourcing processes, and continually increasing the accuracy of forecasted commission expenses.
Transparency also filters up to corporate executives, who get access to clearer results, faster. They can forecast compensation more clearly, providing a crucial hedge in a time of economic uncertainty. They can make better decisions, sooner – which is the value they’re constantly seeking.
Operational Value: Automation
A robust ICM solution that provides smoother integrations, rigorous security, and better usability can unlock the value that companies need today. Here’s how it looks.
Improving compensation accuracy and transparency - ICM tools can deliver value by enabling sales managers to automate the process of projecting compensation, attributing deals, and awarding commissions. By fully integrating an ICM with tech stacks from Finance, HR, and sales, you can give sales managers and reps customizable dashboards that show their progress and compensation. A “what if?” calculator accurately shows how much they’ll earn by closing a given deal—and ending the inaccurate speculation. You can automatically and accurately assign commissions once deals close in your CRM system. And you can implement new compensation plans across calculators and dashboards, so salespeople always have the latest information.
Simplifying the attribution process – Manually attributing deals is a process that is susceptible to human error. But sales comp pros can use ICM automation to apply crediting models and let the software do the math automatically. A strong ICM solution allows managers to add or remove vital roles in the sales process, account for multiple prospecting sources, and ensure the right people get the credit (and rewards) for their hard work.
Strengthen Your Forecasting – Even the most experienced RevOps and finance teams can struggle with the challenge of forecasting sales comp. Arbitrary benchmarks are quick, but not necessarily accurate. On the other hand, building a more predictive model and gathering, cleaning, and validating sales data – can be time-consuming and require significant data analytics skills to achieve the necessary accuracy. ICM solutions enable you to build assumptions into a model and generate forecasts quickly—at the company level, team level, work-stream level, and even for individual sales reps.
Monitoring and improving employee engagement – By their nature, most sales reps have an independent streak that resists “Big Brother” monitoring, and even good-faith efforts to keep engagement high can seem intrusive or condescending. Sales leaders need to keep employees engaged and motivated – and a strong ICM solution can make that happen, enabling them to spot emerging trends at the department, team, and individual level. You can set alerts that trigger when an individual or group shows signs of disengagement, so you can take preventive and corrective actions.
The Value Mandate
In 2023, value is the top-of-the-agenda item for almost every company, regardless of size or sector. How will you meet the new value mandate? We think one strategy is deploying Performio’s incentive compensation management (ICM). Today, ICM isn’t an optional luxury or “nice to have.” It’s the investment that cuts costs, making it a “need to have.” Turns out, even though it won’t be a simple push of a button, this can lead you down a series of decisions that lead you to equipping yourself with said button…That was easy!
If you want to see how Performio can help with your specific challenges, schedule a demo today.