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Should I implement an Incentive Compensation Management Solution?

The return on investment (ROI) of a incentive compensation management system continues to be a debatable topic with various objective and subjective parameters that require inspection before making a business case. Any sales organization looking to improve their incentive compensation management capability needs to justify the investment into new solutions. Superficially, a incentive compensation solution seems like a software that would just be 'good to have' for an organization but scratching under the surface reveals several opportunities for cost savings and increased revenue.

Several factors needs consideration when justifying investment into a incentive compensation solution. An inexhaustive list is:

  1. Delay in product rollouts (Yes, product rollouts have been halted/delayed due to sales compensation system incapabilities)
  2. Overpayment & underpayment rates
  3. Existing process inflexibility to plan changes. Solutions should always fit business needs, businesses should not compromise due to solution limitations.
  4. Frequency of late payments
  5. Attrition rate
  6. Dispute resolution turnaround time
  7. Availability of data for analytics and management reporting needs
  8. Audit and compliance risk
    As with any ROI estimation, let's review the costs associated with these factors and the tangible gains we can achieve from the proposed investment in an efficient ICM solution.

Overpayments

Estimates suggest that overpayments amounts to approximately 3-8% of total incentive compensation spend. These overpayments generally go unreported by the beneficiary salespeople but still creates an environment of distrust. This is especially pronounced in spreadsheet based solutions. Recent studies suggest that a whopping 88% of spreadsheet models contain errors. An ICM system with automated validations and an intuitive workflow can help reduce these overpayments and recover these losses. By and large, these cost savings alone can act as justification to move from spreadsheet based systems to software as a service model.

Underpayments

Incentive compensation underpayment errors causes salespeople to distrust existing ICM solutions and encourages them to create their own parallel processes to calculate their ongoing commissions affecting net selling time. In addition to these shadow accounting practices, underpayment errors create increased disputes resulting in loss of productivity all around. It's estimated that the opportunity cost from this amounts to about 5-10% of compensation spend. These opportunity costs when accumulated across the entire salesforce becomes significant.

Attrition rate

Demotivation and reduced engagement of top performers arising from incorrect or delayed incentive compensation results in higher attrition rates. This not only piles on additional administrative costs such as legal, recruitment, training, sales personnel interview time but also results in loss of revenue due to vacancy and required ramp up time for new hires. This financial impact of attrition is usually underestimated. In general, it takes about $50K as cost to hire one experienced salesperson while the loss of revenue varies depending on the industry between $100K-$500K. For a medium sized salesforce a 2% reduction in attrition rate can mop up millions in cost savings.

Administration cost

In a spreadsheet based ICM system, sales compensation analysts spend majority of their time in validating inputs and recalculating outputs and cross-checking against parallel calculations. This reduces result analysis time and hinders value added analytics that can reveal great business insights. Reduced result validation time forces analysts to calculate manual adjustments to account for calculation errors. With the implementation of an automated ICM solution, administration cost can be reduced significantly and the time saved can be used for supporting adhoc analytics. This also helps in reducing reliance on a few analysts maintaining the worksheets and supporting business continuity. An intuitive workflow can help streamline the entire business process with visual documentation.

Timely Insights

An automated ICM solution also helps in timely actionable insights to drive business decisions. It helps the analyst in identifying subtle motivational issues with the existing plan and supports the sales leadership in course correction. Such timely changes can drive the overall alignment of salesforce behavior with strategic corporate business objectives. While it may seem as an isolated business process in the vast sales domain, the ICM systems act as a pivot around which a detailed sales analytics practice grows. Hence insights gained from sales compensation systems have a greater impact on overall sales operations.

Conclusion

Implementing an automated ICM solution results in reduced operating expenses and increased net selling time which boosts top line revenue. The ICM solution reduces ambiguity in incentive compensation calculations and improves reliability of your plans. More importantly, an ICM solution creates an environment of trust reducing attrition rates and boosting salesperson morale. It also provides flexibility to implement new ideas in a timely manner to stay up to date with the dynamic business environment.

Thoughts? Did we miss anything significant? Let us know in the comments below.

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