Hey, sales compensation team: We know your little secret. We know about the shame and guilt, about the many hours you spend alone in your office. Don’t worry, we won’t tell.
What we will do is help you find the motivation to change. Once and for all, put away that spreadsheet, whether handwritten or on a spreadsheet program, and make the commitment to automate your sales compensation.
Did you think you were the only one? According to Christopher Cabrera, president and CEO of sales performance management firm Xactly (www.xactlycorp.com), you are not alone. “We are constantly amazed at how many companies are spending tens of millions of dollars in one of the largest cost centers they have, and it isn’t automated at all. It’s all on Excel®. A huge majority of the public companies in the world are doing this process exactly that way,” he says.
Did he just say ‘tens of millions of dollars’? That’s right. “Think of a company with a 200-person sales force,” Cabrera illustrates. “Generally, the sales people will earn $50,000 to $100,000 in variable compensation. That’s a 10 to 20 million dollar cost center. If you’re in charge of variable compensation and I ask you to do all those calculations in Excel, keeping in mind that these 200 people are all paid differently and have different quotas—some sell different products, some are inside sales, some are field sales—it gets very complicated very quickly.”
Failure to Automate
That innocuous-looking spreadsheet is actually leaking money, Cabrera says, and he specifies where to look for the leaks. First, check out the errors. While you may have programmed the spreadsheet yourself, the complexities involved are likely producing errors, some of which you find, others you don’t find.
“Gartner Research has done some good work in this space that shows an error rate of about 3%–8%,” Cabrera says. “So that’s 3%–8% of that $10 or $20 million. It could be that I’ve paid the salesperson for a deal that didn’t happen, or that my thumb actually hit the 2 when it should have hit the 1 and you got a 20% commission instead of the 10% you should have received. This kind of thing happens over and over again, and you can imagine the cost for a company like the one with 200 sales people.”
Another leak is in productivity for the sales team. “If you’re one of those sales people, you’re constantly worried that you’re not being paid accurately. You’ve seen it happen; you didn’t get credit on a sale or whatever. So you begin to create what’s called shadow accounting. You create your own compensation spreadsheet. Gartner has done studies on this, too, and they show almost 10% lost productivity for sales people, because they’re spending one hour out of every ten tracking their sales commissions.”
Shelley Keefe is the Business Operations Analyst for high-tech firm Ingres, and she seconds Cabrera’s assertions. Before she came to Ingres, Keefe had extensive experience in sales compensation, so she understands the problems it tends to have. Once she took over the function at Ingres, she went out to bid to automate the system. Although her company’s former CFO was an excellent programmer and had written their sales compensation system himself, it was not as efficient as it could have been, she says.
“We’re a small but global company, so we translate U.S. dollars (USD) into several different currencies. On a quarterly basis, we would translate out from USD into the payment currency of the sales force. At the time, currency markets were in enormous flux, and that sometimes didn’t sit very well. Sometimes we were overpaying, sometimes underpaying, based on the fact that business came in local currencies, but we had no way of paying in that same currency without going through two translations—in and out of USD.”
Leadership worried, says Keefe, because no one really knew how much they would be paying out in any given quarter. “If you’re a CFO it makes you a little nervous that you can’t tell the Board with any accuracy how much you’re going to be paying. It took a lot of his time. When I came on board, I basically took over the function, which helped. But I am not a programmer by any means, so there were times when he had to jump in and do things. As the company grew, the pay system became more complex, and we needed to try and minimize our risk on the currency market fluctuations.”
ROI on Tactical, Strategic Capabilities
Cabrera says all of this falls into a category he calls tactical. This includes cleaning up errors and getting rid of manual processes that cost time and money. You can realize a return on your investment with this part alone. “First, you get rid of that 3%–8% error rate,” he says. “With a 200-person sales force, you probably have three people managing the quagmire of manual and spreadsheet processes. You’re probably going to take that down to one person when you automate. That’s a huge ROI [return on investment], hard-dollar savings right there.”
But that’s just the beginning. “Once you’ve addressed the errors and productivity, you can ask, ‘how do we pay them differently’? A lot of times I’ll go into a company and ask them, if they could wave a magic wand and pay people in a way that they believe would drive the best behavior, in alignment with the company’s business goals and objectives, what would it be?
“Frequently, the answer I get is that they would change the timing. Now, they probably pay 100% of the commission when the deal is closed. That’s very common. But often they would like to pay 50% when they close the deal and 50% when the customer pays. If they do that, the salespeople make sure they’re doing quality business. It gets them to be, in a way, collection agents for the company.
“Imagine how many times sales reps are paid 100% of an order that is signed, but that is never paid. Now the company is stuck trying to get the money back.
“With manual systems, companies won’t even try to make that kind of a strategic change, because it is already too hard,” Cabrera continues. “Adding another layer of complexity, so the finance people have to track half of it and figure out who has been paid and whether they’ve collected the money… it just gets too difficult to monitor, so they don’t do it. This kind of thing is simple with an automated system.”
Paying sales people with incentive compensation, by definition, means you believe it will make a difference in how they work, he says, so you should use it to get the best results—something that’s hard to do with limited manual systems.
“I can’t tell you how often I go talk to a sales organization where the reps look at their commission program like it’s the lottery. They have to wait until a month after the end of the quarter, and it’s like they roll the dice. That’s not motivational. That’s not driving behavior. That’s luck theory!” he emphasizes.
Cabrera’s advice for the compensation team? Focus on the ROI when speaking to your CFO. “Get them focused on the strategy part of it,” Cabrera says. “It’s the behavioral science behind getting these 200 sales people to sell more stuff. That will get the CFO’s attention because that goes right to the bottom line.”