Good sales incentive management boosts profits

Executive Summary

• Incentivisation compensation management (ICM) software allows employers to administer variable pay in order maximise profit by tracking the right type of selling and customer service.

• Most employers still use ‘homegrown’ systems based on Excel spreadsheets but these often cannot handle complexity such as multi-country systems and so are prone to error.

• FDs and HR directors are taking a more prominent role in the design and management of sales incentive plans. HR has a duty of care for the employees and how their base pay is handled and the FD is focussing on the return on investment (ROI).

• ICM systems provide tools for modelling ‘what if’ scenarios so companies can try out new packages and see their potential effects before going live.

• ICM leaves an audit trail so people’s pay, every transaction and change is be tracked and reported. Huge amounts of management information can be produced by ICM systems to check performance across the company.

• ICM systems do not replace traditional people management practices. Good management is crucial to avoid poor sales practices.

Main feature

The figure of the sharp suited, smooth tongued commission hungary salesman is universally recognised – and possibly loathed too. Nevertheless, sales are the lifeblood of most businesses and some kind of incentive, such as commission is almost inevitable and probably desirable also.

Offer sales people an inflated base salary and there may be little motivation to sell; pay them too little and they may have few qualms about how, what and to whom they sell. Fortunately, businesses appreciate that contented customers are equally important to the health of the bottom line. Incentivisation compensation management (ICM) can help them to balance the methods of motivating their sales people against customer needs and the health of the bottom line.

“ICM is a strategy, a process of implementing a variable reward strategy across a company for all types of sellers,” explains Jo Walker, managing director of ICM system and software provider Practique. She describes ICM software as an end-to-end solution for the automated administration of variable pay – whether bonus, commission or any other type of incentive.

“It’s about providing the tools to embrace the incentive plans to enable a company to deliver or reward profit by doing the right type of selling and customer service. It’s not just target orientated. It should drive behaviour so that sales people are mindful to sell the right products to the right customers resulting in a high degree of customer satisfaction,” she says.

Until the advent of ICM software and systems, most companies would either build their own systems or simply use an Excel spreadsheet to measure the incentives used to motivate their sales people and the effect on sales, profits and customers. “Some companies use Excel to do it all themselves, but homegrown systems are often prone to error,” says Ron Burke, head of Europe sales force rewards practice at Towers Perrin. “It creates some risk for the company, as often there may be only one or two people who understand how the spreadsheet formulae are put together.”

Walker points to the very high cost of running homegrown systems. Her firm carried out research concluding that the cost of administering a homegrown system, no matter what the industry or sector, works out at some £1,100 or £1,200 per person per year. “If you have 500-plus sales people on variable pay plans, that’s a very high cost. It takes a lot of administration to sort out the system with lots of people touching the process and manipulating data and there is plenty of room for error.”

As both she and Burke point out, room for error raises further issues. Where sales staff do not trust the accuracy of the reporting, they may begin to keep their own personal tallies, which ultimately takes them away from the sales work they should be doing, as well as discouraging and disincentivising them. Not surprisingly, Walker says that some employers’ costs are running into the millions. “Getting it wrong can make the difference between profit and loss,” she says.

Traditionally, the finance and HR directors were not involved in the design of sales administration and management plans. Today, however, both have taken prominent roles – HR because it has a duty of care for the employees and how their base pay is handled, and the finance department because of the focus on return on investment.

Sales people need to understand the plan and how it relates to what’s in their pay packet. Burke warns that overly simple does not do it. “You can implement a simple commission plan where you are paid 10% of everything you sell, but that may be completely wrong for many firms.” But he still argues that sales compensation plans should be kept as simple and easy to understand as possible.

He says that many employers have grown systems that are highly complex simply because they are multi-country and multi-product, with a host of different profitability impacts. The increased complexity provides a challenge for homegrown, Excel-based systems because it is difficult to handle any changes such as when new rules are introduced or new products sold. It is not easy to track any changes, and the systems tend to be less agile and lack flexibility.

The beauty of ICM systems is that all those functions are automated, they collate the data for each system – all the products sold, the profit margins, the time lag between orders being received and despatched and how the commission model is working. “It gives the data for calculating incentive payments. Are we paying commission on the right products? Are we selling lots of easy-to-sell low-margin products and neglecting the higher-margin ones?” asks Walker.

ICM systems also provide tools for modelling ‘what if’ scenarios, so employers can try out new packages and see their potential effects before going live. Walker gives the example of budget travel firm STA Travel. While tickets were the easiest products to sell, they were also low margin. Hardest to sell were insurance and world tour deals. The firm was able to use modelling to see how it could incentivise its salesforce to sell world tours so that revenue could be shared with its airline partners based on the potential new business.

Walker argues that firms should be able to model different outcomes so that they stay in control, particularly of their costs. “They should be able to model their plans and analyse the effect if everyone hits their targets and some people overshoot the target. What will it cost the business?”
Ultimately, she says, firms need to understand the variables in their pay strategy. They need to look at their ICM systems and ensure that they have the data, framework, calculation engine and the flexibility for creating statements, reports and an audit trail. “ROI is so important – people’s pay, every transaction and change must be tracked and reported. If someone leaves or joins, it must all be audited. Audit trails are important.”

John Archibald, director of operations at Incentivise, agrees: “It’s vital that they have a robust and auditable framework for incentivised packages so everything is accountable and you see a paper trail. There are huge amounts of management information produced by ICM systems, so you can see at different levels in the organisation who is producing what and who should be producing and isn’t.”

A report produced by research analysts, Bloor suggests that ICM can help to attract top sales performers because it enables complex compensation plans. It suggests that because they are confident of their own abilities to succeed, top performers are interested in payment by results.

However, Burke sounds a note of caution about over reliance on sales commission systems. He argues that employers are always trying to put too much into play and to get the compensation plan to do everything for them. “They’re abrogating their responsibility to manage their sales force properly. Compensation is just one of the tools. A good sales commission plan can balance both profit and misselling, but it cannot do it by itself.”

He also argues that to make the most of their systems, firms should have a disciplined regular process for monitoring their sales compensation systems. “They need a formal process to assess how it works and how it fits in with their future plans.

ICM has clearly grown to become an important tool in the executive armoury in terms of cost control and driving sales compensation systems. Not only does it enable businesses to measure the effectiveness of their sales compensation systems, it provides a mass of data, so finance directors in particular can see what particular incentives have cost and what the company has gained for that outlay. It also provides valuable audit trails for real time analysis, taxation and corporate governance purposes. No wonder technology research company Gartner predicts that the European market is set to see compound annual growth of 25% between 2005 and 2010.

Market Statistics

• Worldwide, the ICM software market grew 20% over 2007, up from growth of 15% in 2006.

• The European ICM market is valued at Euro53m and is forecast to grow at a compound annual growth rate 25% between 2005 and 2010.

• More than 90% of enterprises will focus on using ICM systems in 2008. The initial drive will be to use calculation engines to improve accuracy and administration time.

• In Europe the telecommunications and hi tech sectors are the biggest purchasers of third party ICM solutions, accounting for over 40% of the market.

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