The Incentive Compensation Process
The 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.