incentive compensation

  • October 16, 2015
  • I’ve been saying for a while that we’re heading toward an era when process dominates and traditional transactions become just one part of those processes. Now, you might say that’s the way it’s always been and I won’t disagree. But historically, processes were more or less managed by employees who used information systems to inform their decision-making and the result was recorded as a transaction.

    Today we are increasingly asking our machines to run the show and that’s fine but too often we expect the old systems that supported employee mediated processes to support customers. It’s a bad idea too because in my research, one of the greatest sources of customer unhappiness is a process that crashed because the customer didn’t know enough to use the transaction support system properly. Truth be told, Einstein might not be able to fathom some of these older systems and I know he’d be one of the first to complain. He once said repeating the same action expecting a different result is the definition of madness. So I wouldn’t expect old Mr. Relativity to take more than one crack at some of the transaction support systems out there today.

    But there’s all kind of good news for process devotes like me these days. Two major customer facing processes have gotten the support they need and are writing CRM history—CPQ and Incentive Compensation. Another, the loyalty process is on the horizon.

    CPQ

    Like many of today’s star processes, CPQ was a totally manual thing for a long time and it involved many spreadsheets. There were sheets for products and price lists, sheets for discount structures, and of course, proposals were generated on spreadsheets too. CPQ was a manual task that many sales reps found ways around that ultimately cost their companies money. For instance rather than generating new quotes for each customer, sometimes a rep in a hurry would change a few particulars on another quote and have something. This often took no notice of delicacies like one customer’s discount level against another’s. Sometimes prices changed and the changes weren’t reflected in the cloned proposals. Ooops!

    It goes on and on but it’s nice to know that those days are in the past for any company that uses a modern CPQ system. Better yet, CPQ systems make it easy to include the boss in a workflow to check the discounts and configurations. So with all this CPQ became a process rather than just a bunch of loosely tied spreadsheets.

    Incentive Compensation

    The biggest change in processes, I believe, comes in the incentive compensation space. Here’s a process that started in the back office and completely morphed before becoming a sales tool. Compensation was largely a financial department thing handled by the CFO’s team at the end of a quarter. They tallied up sales and cut checks and sometimes there was broad agreement between the back office and the sales reps. Other times, the reps found errors and were upset.

    When automation took over it became very easy to come up with numbers at the end of quarters that everyone accepted. Incentive compensation systems replaced the overlapping spreadsheets that sales managers used to record attainment and incentivize reps, as well as the spreadsheets that the reps kept, often called shadow accounting.

    Then something really interesting happened. Sales managers realized they could proactively plan the quarter or even the year using what had only been a retrospective financial and accounting tool. Not only that but they were also able to more finely tune incentives. Early comp plans stressed a dollar value for making quota but with a real system, managers found they could assign goals by product, profitability, or just plain revenue if they wanted to. The point is they suddenly had the ability to customize the ways they managed people.

    We’re a long way from being done with this conversion too. Process centric systems like CPQ and Incentive compensation are becoming the places where back office meets front. CPQ is most effective when it can easily access back office data about what products a customer already has, the master product and price list, and the customer’s payment history. Incentive compensation can do a better job when it can integrate employee data from HCM systems, for instance.

    In all of this we can see a discussion starting about the incentive process or the quoting process and not simply getting the goals and objectives or a quote out the door. That’s progress because it gets us closer to being in some very important moments of truth with our customers and our employees. What’s next? I am thinking a lot about a customer loyalty process these days. Loyalty is too often associated with a transaction—you buy, I give something, a “reward” in return—which I think is wrong because it doesn’t really promote loyalty. If what you want is some way of assuring yourself that a customer will behave loyally even when you aren’t giving something away, then you need to seriously rethink it. Hint: Apple doesn’t give rewards or discounts but its customers are among the most loyal. Why? That’s a story for another time.

     

    Published: 3 years ago


    It is subtle, but in the spring conferences I see a pattern emerging around the importance of process. Admittedly my analysis in this case is a less than scientific and I have no statistics to support my idea but I my instinct says a trend toward process is beginning. Two conferences that support my contention include Xactly and Zuora both of which are happening this week in San Francisco.

    Xactly focuses on the incentive compensation process and Zuora on the subscription billing and payments part of business. You could say they’re at opposite ends of the sales process too and I think that’s apt. For now let’s focus on Xactly’s CompCloud, which I attended first.

    A few years ago these conferences might have been described as events to support software packages that did specific transactional things such as invoicing and collecting payments (Zuora) or organizing an incentive compensation plan to pay sales people (Xactly) and you’d have been right. A few years ago these were simple transactions. Take the incentive compensation idea as an example.

    When Xactly got started, ten years ago, CEO Chris Cabrera told me, the business problem was all about trying to corral sales data at the end of a quarter to tally up sales, various incentives, bonuses and other quirky things that went into a commission check. It was a big deal too, requiring the CFO and his team at times to burn some midnight oil so that the compensation checks could be cut quickly for the reps—and accurately for the company. The old joke is that only half of the commission errors are ever caught by accounting and in this case, you can figure out which half.

    So incentive compensation was a transaction that happened after the fact and whatever the incentives did was mostly in the mind of the rep because the business had only a tenuous hold on the incentives squirreled away in spreadsheets. That’s the case for the majority of businesses today too. Cabrera told his keynote audience that about 85 percent of businesses still rely on spreadsheets for compensation plans and are thus left in the transaction part of business rather than figuring out better ways to incentivize people to do great things.

    But look at what the 15 percent that use technology can do. If you use a compensation system with a database behind it rather than a spreadsheet you can actually make a forward looking plan that you can revisit and play what-if scenarios with. Moreover, you can develop a more sophisticated plan that is not only designed to bring in a number but the plan can have multiple sub-numbers that can be tracked and incented differently. The parts provide greater flexibility to craft incentives that more clearly match the company’s objectives.

    When you get to the point of having a plan and sub-numbers you are looking forward as well as backward though backward is all that the spreadsheets allow and that means process. A system enables you to model the future and influence how you and your people get there. And a process enables you to put some oomph behind the idea of incentivizing people to do their best work.

    It must be working because on the morning of the keynote, Cabrera also briefly mentioned a news item that crossed the wires at about 5:30 AM PDT. After ten years of being a startup Xactly is filing for its IPO. At a stroke the IPO will give Cabrera the ammo he needs to grow the company even faster and bring his message to more people.

    What’s most interesting about this is that Xactly’s sights are not only set on incentivizing the sales reps or helping companies bring in larger deals. The company believes that incentives can be an effective part of every employee’s compensation. Studies show that when as little as 3 percent of compensation is set as variable it can have a positive effect on performance throughout an organization. That’s not a big number but it is enough to help get people’s creativity going to empower them to do better. If that’s not a virtuous process to augment performance I don’t know what is.

    Finally, the thing I really like about this company’s vision is its willingness to annonymize its data to look for macro trends in the industry. So far one of its great successes has been to discover that women really are paid less than men even though the statistics say they do better and stay longer. The Wall Street Journal ran an article on the study last year and it has caused several companies in the Bay Area to examine their own pay data to discover if they are paying people equitably.

    That’s the way technology advances society. First something is not possible because we don’t have the data or the processing power to investigate a hypothesis, then we do. Then, and this is the point, everybody’s got to have the new thing. This is what sparks exponential growth and it’s why Xactly’s offering may be coming at a very good time. Of course, this is not to imply that I am offering financial advice. Just saying.

     

    Published: 3 years ago


    1-new-york-city-debra-hurdBringing a new product to market or even a new version of an existing product is not what it used to be. Back in the day your market was probably empty, a green field where you could find opportunity under a rock. Everybody needed what you had and selling was relatively easy.

    But things don’t stay that way for long and today you have to work hard to insert a new product into a crowded market. As a result, a product launch takes on the proportions of a military campaign. You gather information and make projections, your marketing team develops and positions their ammo, and you train your sales troops and drill their objectives into their noggins. Then you go to war.

    Ok, so the metaphor is deliberately hyped but there’s still a grain of truth in it. Rolling out a product is a big deal, it does require careful planning, and there are a lot of moving parts, which is why there’s so much planning to begin with. In short there is risk. However, there is always risk in marketing and sales. There is risk the market will change and your core product will get on a fast track to commodity status, a risk that your sales team won’t be able or inclined to sell it. A product rollout is just one more risk.

    Most often we handle risk through a portfolio strategy, we don’t put all our eggs in one basket, as Mom used to tell us. We get that but how do we use this wisdom in a product rollout?

    If you have more than one product, you already have a portfolio though you might ignore this fact. Each element in the portfolio has a risk associated with it and — get this — the risk is perceived differently for the business and the sales person. The sales manager and anyone higher up understands the importance of selling the new, new thing. It usually has the best margin and is more profitable than older items that are rolling down the road to commodity-town. Everyone should want to maximize the new product, right?

    Well, if you are a sales rep, the risk you see is in the grind to make quota. If you are compensated on revenue and not profit, loss, or margin, then the fastest and easiest route to the cheese is often by selling what you know best because, hey, revenue is revenue. That’s where compensation management makes a great contribution. Using compensation management gives an organization and the sales team the chance to balance out their respective risks.

    For the business, this means assembling a portfolio of requirements or expectations that include supporting the new product rollout as well as maintaining the continuing business. Many organizations will put a separate quota on the new product to ensure compliance so that while a rep might be able to make a lot of money avoiding the new product, he or she will not be considered a solid citizen without also contributing to the rollout.

    For the sales rep, it’s all a game anyhow, in the best sense of the word. A mixed portfolio of quotas is just grist for the how-am-I-going-to-make-club-this-time calculation that everybody does.

    So the sides are evenly matched, except in one very important area. How are you going to keep score? For sales reps, score keeping is done on a W2 form, but for managers it’s much more difficult. Let’s agree that we never want to hand out a goal and an incentive unless we have a way to measure attainment. The spreadsheets that many businesses use for relatively simple, how-much-did-you-sell incentive compensation calculations basically roll over and play dead if you have to begin figuring out multiple products, their unique incentives, and attainment — and we aren’t even bringing splits into the discussion.

    Very quickly several things become increasingly clear. First, while you might have gotten away with using spreadsheets for incentive compensation in the good old days, today is different. Second, taking a portfolio approach to selling makes a lot of sense, if you have the tools to do it right. Third, you have to stay ahead of your competition and in this case it means if your reps are using spreadsheets to track their individual performance, it’s time for you to get more sophisticated by using a modern, database-backed system that can easily track multiple people, products, incentives and more. Only then can you accurately and fairly reward the people who took the greatest risks and met or exceeded expectations.

    Woody Allen once quipped, “To a knife fight, always bring a gun.” This is like that.

     

    Published: 4 years ago


    carrot-and-stickThe story of front office automation is shifting from data to process, but the idea is so new that you’d be hard pressed to identify a movement by that name.  However, I am happy to coin a term and if you consider the developments of the last decade a clear picture emerges.

    CRM and other front office solutions emerged as systems to manage data capture and retrieval.  SFA managed the data collected about prospects, contacts, and deals; marketing managed aspects of lead development and marketing spend; and service systems juggled data about customer service needs.  In all cases CRM systems served up data for human decision-makers to use in performing largely manual activities.

    Then the Big Data revolution happened and its first effect was to document a need to simply handle all of the new data being churned up by social and other customer facing systems.  But once data was corralled, data scientists began using analytics against the data to discover new information about business.  This created a positive feedback loop in which growing databases provided information back to business practices and in the process improved them.  Process automation soon followed.

    Today big data and analytics have spawned the move from data management to process management throughout the front office.  In some cases this movement has created whole new automated business processes and incentive compensation is a great example.

    As a process, incentive compensation is not new, but its automation and the extent of its influence is.  It had always been a time consuming manual process with limited applicability — business leaders may have known what to do but lacked the tools.  At its greatest extension, the manual incentive compensation process applied to executives with employment contracts and to sales people with quotas.  Human Resource departments handled executive incentive compensation while the finance group manually reconciled sales and commissions — a long and labor intensive effort.

    As Chris Cabrera documents in his excellent book, Game the Plan — Every Sales Rep’s Dream, Every CFO’s Nightmare, automating the compensation process has spawned not only an automated incentive process, it has also introduced a new best practice.

    In sales compensation it was always assumed that savvy sales people could game the compensation plan to their advantage.  A wise saying in compensation management is that you get the results you incentivize and the caveat is that we sometimes inadvertently incentivize the wrong thing.

    Gaming the plan is the inevitable result — in other words, without any formal process orientation by most companies, their sales people invented their own processes.  Typically this means sales people preferentially peddling the products that are easiest to sell or that have the highest commissions or generally doing whatever is the easiest path to quota attainment and maximizing their commission plans.  Too often though, reps’ ambitions do not square well with management’s needs, for example, to sell the new product which might be the future of the business but would require more sales effort.

    That was typical in an era when compensation management meant capturing sales data in spreadsheets and manually checking for business rules compliance — accelerators, spiffs, contests and the like — and calculating compensation.  However with automation of the core compensation process, companies have discovered they can move the discussion upstream from compensation after the fact to incentives before the fact.

    With incentive process management vendors are now able to develop plans that more accurately reflect the goal attainment they intend paying commissions for.  None of this incentive management precludes a sales person from attempting to game the new plan but it does change the rep’s calculations.  By managing incentives better sales managers can set specific goals by product, revenue, and even profitability so that the path a sales person takes to quota is more inline with the company’s objectives.

    Improving the incentive compensation process is also in line with other process advances now circulating.  According to CSO Insights, and their twenty-year longitudinal study of the sales profession, the heart of sales attainment improvement is deploying better processes throughout the sales organization including in hiring, coaching, and managing sales teams.  For instance, their studies have conclusively shown that businesses with formal sales processes, especially when backed up by automation (they call this dynamic sales processes) significantly outsell their competitors with random or informal sales processes.

    In this light the incentive compensation management process is an important supporting business activity that feeds into overall sales improvement and there’s plenty of room for improvement.  CSO Insights market study shows that only 57 percent of quota carrying sales people made or exceeded their targets last year.  That means 43 percent failed to bring in the revenue that their companies were counting on.

    It’s impossible to always get 100 percent of a goal but there’s plenty of room for improvement and incentive process management is a worthwhile investment for many companies trying to get to the next level of sales performance.

    Published: 4 years ago


    Ok, the title’s a cheap paraphrase of the T.S. Elliot book that inspired “Cats.”  You have to start somewhere and that’s as good a place as any.  But stay with me, this goes places.  A big group of cats is called a clowder.  What if we could access a clowder of big data?

    Big Data has been taking up a big part of my conscious life lately what with all the analytics vendors out there and so many companies trying to figure it all out.  There are at least three issues that converge when you discuss big data, two that we know and one that we don’t pay a lot of attention to just yet.

    The two devils we know are physical storage and analytics and many people stop there.  Storage has largely been taken care of with dirt-cheap spindles, the cloud, and other advances.  Analytics is an old story that’s gotten better year in and year out.  Huskier processors, bigger spindles, and in memory databases have made real time slicing and dicing easy.  The other day I spoke with Alan Trefler, CEO of Pegasystems who told me that software and hardware have advanced in equal measure over the years to the point that today we can do quite a bit of analysis in very little time.

    Batch pattern analysis gave us the input we needed to get predictive, to assign probabilities to situations based on prior experience and that has given us the ability to stack rank ideas, offers, and generally to be able to say this is the next best thing to do or offer — not always but — in this particular situation.  It gives us the ability to (sort of) be in the moment with customers.

    Predictive modeling has been a great way to enable companies to better understand customers and their needs.  Based on company-gathered and maintained big data we can confidently deploy systems that suggest to employees what to do next.  In case after case that I listened to in Orlando during Pega’s user meeting, Pegaworld, I heard of huge improvements in business process results, in part due to leveraging analytics and big data, so good for them.

    But please pay attention!  In these last few paragraphs we’ve traversed the long path from data to information.  Did you catch it?  Maybe not.  Analytics turns data into information and people (usually) turn information into knowledge.  Our systems serve up information but our people, our employees apply that information in customer facing situations to make decisions that achieve desired outcomes.  There’s nothing more important that good decisions in business today which is why we are fixated on big data and analytics.  But we can’t stop there.

    It’s time to think bigger.  What would it be like if we could amass more data than a single company typically captures for its analysis?  Naturally, this assumes all the data is relevant to a set of business processes.  It’s very hard to do something like this.  Some vendors I’ve spoken with about this say that the data lives in many places and consolidating it is not necessarily quick or easy.

    One place where it might be easier to accomplish this kind of Major Big Data consolidation — can we start calling it Major Knowledge? — might be in SaaS applications.  Of course not just any software as a service but those systems that operate on multitenant storage might have an important leg up.  A company like Salesforce, NetSuite, or Xactly might be a good place to look.  In a recent conversation I had with Chris Cabrera, CEO of Xactly, I heard they were thinking about what that would look like.

    You may recall that Xactly focuses on incentive compensation management.  Xactly collects data that focuses on sales people, deals, credit (for partial deals), compensation, and much more.  If properly scrubbed so that all identifying data is removed, this database would be capable of revealing all the best practices information in sales by examining the way that people are compensated, no small accomplishment.  In the right hands, that information can become powerful knowledge.  I know some of you are saying why not look at other data like revenue or stack ranking the reps or any of a thousand things.

    The answer is simple.  Other data won’t give you the answer.  Incentive compensation is an art at the moment (unless you already use a system like Xactly) and relying on a single data set might only reinforce bad practice.  Capturing data from a wide body of knowledgeable sources is, after all, one of the hallmarks of crowd sourcing.

    People do their jobs and they get compensated and someone is the top rep and someone else is at the bottom.  But these rankings don’t say anything about whether the incentive compensation was really an incentive, whether or not it caused people to modify behavior.

    So what, you might add.  But wouldn’t it be nice to know if the incentive is both effective and in the right proportion?  What do others do?  Effectively, what’s the best practice?  Those are questions you can’t answer if all you’re looking at is your own data.

    Sales comp is a big hairy issue.  It’s estimated that in the United States alone companies spend $800 billion per year supporting sales based incentive compensation.

    It’s messy and full of 25% credit for this deal and 65% credit for that; it also has accelerators and clawbacks so how do you get it right?  For example, Xactly found that 75% of its customers are crediting five or less individuals on a deal, but some outliers credited up to 161 individuals on a single deal. Splitting a deal 161 ways can hardly be motivating.   Many are the stories of sales people who left a job because they felt under appreciated (i.e. compensated) or just thought they could get a better deal elsewhere.  Having access to information based on such a huge volume of data might give every sales manager and HR or- finance department the concrete information they need to do a job they are largely guessing at right now.

    Sales compensation is not the only area worth exploring with this approach either.  The same techniques can be applied to every job category and if you’ve looked lately you will have seen that many jobs are coming to have incentive compensation as a part of the package. In fact, an estimated 84% of companies today are now using some kind of incentive compensation outside the sales function.  If you ask me, there’s never been a greater need for the kind of data resource pooling and analysis I am proposing here and it’s easily within our reach.  We just have to think a bit different about the challenge at hand — how to attract and retain the best talent — because business today is less about your widgets and more about the quality of people you have representing them.

    Published: 5 years ago