A brief overview of sales incentive programs
Superior sales organizations cannot thrive without successful incentive programs (aka “sales commission programs”). Well-designed sales incentive programs energize the sales force, enforce correct priorities, and provide a sense of accomplishment to representatives.
Yet, the great majority of sales organizations greatly struggle to design and implement effective sales incentive programs. Too often, implementation defects or design oversights leave sales representatives confused, angry, starving, or too comfortable – when they should be pushing for the next level.
To better understand some of the challenges associated with sales incentive programs, consider the following “simple” commission plan:
- The commission rate for legacy products is a flat 2% of revenue at quota, but 5% after quota
- The commission rate for new products is a flat 8% of revenue at quota, but 15% after quota
- Quotas may be adjusted by sales manager up to 30 days before the end of the quarter
- Commissions are paid to territory representatives using a team split commission model
- A minimum 70% of quota achievement is required for any commission to be paid
- Total compensation is capped at 3x base salary
- Managers receive 10% of total commissions for their territories
- Commissions are protected from territory account reassignment side-effects for 1 quarter
- Refunds associated with past purchases will count against the latest quarter’s quota
- A special 25% salary bonus will be awarded representatives achieving 200% of quota
- Subscription-based purchases will be credited at 50% after 6 months without cancellation
- <several other rules>
The problem with in-house automation
Companies who decide NOT to automate such rules must rely on costly human labor (ex: sales leadership, accounting, finance) to perform calculations manually and issue commissions. It should not be surprising to learn that manually-performed calculations are error-prone. This is understandable given the complexity of even simple rules. Worse, representatives who know that their commission was calculated manually by a human employee will inevitably initiate disputes, perform biased audits, or even engage in heated conversations.
It’s a lot harder to argue with an automated system. However, companies who decide to fully automate incentive programs often find that a correct implementation is less than trivial. Custom code is almost always needed. Because commission calculation rules often include hidden complexity, the result often is a botched implementation. Even when the implementation is correct, trivial adjustments to the original plan’s design often have cascading effects – software re-architecture, lengthy round-trips to finance / IT, etc.
Typical challenges associated with botched sales compensation plan design or implementation include:
- Productivity issues
- Managers constantly argue with representatives about commission calculations, or even the incentive program’s design.
- Representatives spend too much time auditing commission calculations, or double-checking crediting of individual sales (aka “shadow accounting”).
- Business alignment issues
- Implementations are unable to automate complex rules, even though they capture important sales behaviors the organization wants to promote (ex: boosted reward for new products).
- Implementations are unable to accurately model organizational structure (ex: hierarchical territory structure, periodic sales cycles, time-bound promotions).
- Clarity issues
- Representatives regularly express surprise / confusion / frustration about commissions calculations, or plans adjustments due to lack of clarity or changes they were not aware of.
- Representatives end up with end-of-quarter “surprises” (good or bad) because systems don’t let them efficiently assess performance vs. sales objectives.
- Flexibility issues
- Implementations require questionable one-off “quick fixes”, or extensive system re-architecture to accommodate even minor changes.
- Implementations do not support configuration of custom incentives (ex: personalized compensation plan, one-off sales contest).
- Correctness issues
- Implementations cannot handle events which are disruptive to commission calculations, yet common (ex: refund request, account reassignment, mid-quarter territory redesign, etc.).
- Implementations cannot handle products with non-standard billing cycles (ex: subscriptions with associated renewals or upgrades).
- Legal issues
- Representatives may resort to legal avenues following disagreements about plan design or execution, or changes made without their consent.
- Special situations such as extended sick leave or title change have not been considered
A challenging, yet exciting problem
Does any of those issues look familiar to you? Such challenges greatly reduce sales efficiency. At the same time, the inherent complexity, variability, and dynamic nature of sales compensation plans makes solving all those challenges difficult.
Yet, there has to be a better way! We firmly believe that all this complexity can be managed. We believe that a fully automated SaaS-solution can be created to address this need, helping leading sales organizations solve their daily struggle with sales compensation. The fact is that thousands of organizations spend millions in custom code / botched implementations, is reason enough to demand an answer.
Our vision for sales compensation goes well beyond plan design and implementation. It also includes the analytics to measure plan & individual efficiency, dashboards to communicate efficiently with representatives, and AI to help resolve disputes or optimize compensation.