More Sales Performance Bang for the Buck

We've noted before that companies don't have a good handle on their sales compensation plans, and that this is an area that could use a little CFO intervention. Commissions are complex and unwieldy, they have unacceptably high error rates, and they don't do a good job of influencing sales pros to adopt high-yield strategies such as avoiding excessive discounting or selling high-margin products.

Now a survey from Deloitte reveals that the majority of sales leaders are not happy with the status quo either. Only about 40 percent of respondents said that they're satisfied or very satisfied with their organization's sales compensation plan, down sharply from nearly 60 percent in 2006.

The complexity of sales comp programs is a big part of the problem, the study notes. Forty-six percent of respondents said that their plan's complexity has increased over the past two years.

Why do these programs accumulate so much complexity? Michael Herman, principal with Deloitte Consulting LLP and national leader of the firm's sales force effectiveness practice, points to the increasing complexity of the business environment. As buyers become more sophisticated and products more commoditized, companies are responding with increased differentiation of their sales functions and service levels.

"They have differentiated, team-based selling: an inside sales team, an account management team, a product team, an education team, a customer advocacy team ... More and more people have some tangential relationship to a transaction, and the first thing that most sales executives think about is to put them on the comp plan," Herman explains.

Globalization is also driving complexity and adding to the administrative burden. More than half of the poll participants said that their organization is already managing sales representatives in several countries.

In addition, sales compensation plan design is often reactive; if the economy changes, companies almost automatically tweak their incentive structures. "Those little moves tend to overcomplicate or unravel a set of plans that have already been built," Herman notes. "And from the systems side, you now have to do potentially a significant amount of work to go back in and make those edits to the comp plan."

How to get a grip on sales comp? Herman offers four suggestions:

1. Decide who needs to be on the plan. "The first thing I'd ask is "How many people do we actually have being paid?' " says Herman. "Do we have a group of three sales people -- and a plan that has 17 variations and takes another three people to administer?" Take a close look at your pre-sales team, inside salespeople, and service staff who work on an account after a product is sold. "Do they really have an integral role in the sales process, or are they more on the support side? If it's the latter, you could argue that putting them on an incentive plan based on selling may not be appropriate."

2. Simplify the program. Comp plans that are just too confusing can cost finance "an awful amount of time and headaches" to ensure that payments are accurate and timely, says Herman. "If your finance people can't produce those payments quickly enough, you've got a big problem."

3. Get involved in the quota-setting process. Companies should consider how their compensation strategy can help them not only to reward high performers, but also to weed out low performers who are not adding value to the organization. "Getting finance involved in that will allow for a greater discipline not only at the top end, but also at the bottom end," Herman notes.

4. Consider your technology infrastructure. Is your tech tool set calibrated to the scale and complexity of your plan? If you're paying out millions of dollars in commissions and using spreadsheets to run the comp plan, it might be time to upgrade your software. Conversely, says Herman, "for a plan that's not paying out so much money, is there really a need for an expensive tool set, or is this something you can do a lot more effectively internally?"

See the complete 2008 Strategic Sales Compensation Survey here.