But proactive engagement by compensation professionals would significantly improve the entire design process.
Should sales compensation programs have more corporate oversight? Trends point to more corporate accountability for all compensation programs, but many companies allow sales departments to design, manage and administer their sales incentive plans independent from support outside the sales department. Should senior management reconsider this autonomy?
According to the 2004 Sales Compensation Trends Survey conducted by The Alexander Group, just 23 percent of reporting companies assign sales compensation design responsibilities to the compensation/HR function, while more than 44 percent of 260 reporting companies indicate these responsibilities reside with sales management. (The largest remaining category – 25 percent – enlists the aid of a sales compensation design committee.) (See Figure 1.)
In these times of increasing corporate oversight, should companies exercise more control over sales compensation programs? While there are benefits to increasing corporate oversight, there also are downside risks. But proactive engagement by compensation/HR professionals will greatly improve the annual sales compensation design process.
The sales compensation plan often is the cornerstone of a multi-dimensional sales management model. The sales department uses a mix of management tools, including reward programs such as sales compensation, sales promotion incentive funds (SPIFs) and recognition clubs, to reconcile, align and manage many competing objectives. These competing objectives can be varied, such as “grow revenue, increase profits, improve product mix, control costs and open new accounts.”
Many internal stakeholders want to claim ownership of the sales compensation program. Clearly, sales management has a valid claim to this role. Many sales executives feature sales compensation as the center of their sales management model.
In many small companies, the CEO or general manager deems sales compensation as a mission-critical program needing personal oversight and control. And CEO involvement isn’t exclusive to small companies either. In large companies that employ income producers (e.g., insurance, securities, mortgage and traders), the CEO and the entire management team pay close attention to the producer pay plans. Finally, regardless of size or industry, many CEOs find the topic to be of keen interest and often want final say in the selected designs. (The survey puts this percentage at 48 percent.)
Other stakeholders, such as marketing, finance and legal, have similar arguments for involvement and ownership of the sales compensation plan. For example, marketing specialists in consumer packaged goods companies have a particular interest in sales compensation and contests, arguing (perhaps rightly) that the proper application of sales incentives and contests needs hands-on access by marketing to proactively direct the sellers.
Though uncommon, finance sometimes takes the leadership role for sales compensation design. The reasoning varies: Perhaps a skilled resource in finance picks up the responsibility, or management assigns a failed plan to finance for recuperation, or the pricing and contract complexity of sales deals requires extensive monitoring and control. Occasionally, plans end up in legal hot water (fairly or unfairly), so the legal department is the best domicile for such plans.
Compensation and HR professionals manage nearly every other employee compensation program. So why isn’t sales compensation automatically included on this list? Certainly, many compensation/HR professionals are intimately involved in the design process. Others contribute by providing needed market pay information. And, of course, compensation/HR must provide formal “approval” for any incentive program. (Unfortunately, this is more a procedural formality in some cases because the sales department already completed much of the design work.)
Seldom, however, do compensation/HR professionals find themselves crafting, promoting and implementing new sales compensation designs – a lead role they normally exercise with other compensation programs. In fact, many professionals feel this is an inappropriate presumption of authority. Instead, they prefer to contribute to the process rather than select the preferred design. But often their help is requested when it’s too late. The most common scenario features a “broken” sales compensation plan that senior management wants compensation/HR to “fix.” Perhaps there are too many plans, or sales people are underpaid or overpaid. Sometimes, the pay plan doesn’t align with corporate goals. But there are better ways to contribute to the process rather than being called in at the last minute to fix a tangled, broken and maybe unfixable sales compensation program.
The operative word is “involvement.” Clearly, the design phase is where compensation/HR involvement can reap the greatest benefit. The annual design process provides an excellent opportunity for compensation/HR to contribute to this process meaningfully and positively. Other areas are better equipped to manage (i.e., sales operations) and administer (i.e., sales finance) the sales compensation program. Finally, the audit phase provides a much-needed opportunity to evaluate the effectiveness of the program.
Few sales executives would fully support the extreme position of “no involvement by others” in the sales compensation plan. Likewise, most compensation professionals would not wish to assume the position of sales compensation “czar” without participation from others, particularly sales management.
However, a common compensation/HR professional’s lament is that, “If they would only seek our help, we could avoid many problems caused by poorly design/managed/administered sales compensation plans.”
Unlike other incentive plans, sales compensation plans have a high propensity to become confusing, misapplied, compromised, convoluted and just plain “noisy.” Effective programs demonstrate restraint, are specific, anticipate and address most program challenges and clarify the focus among competing objectives.
Ultimately, the preferred oversight solution represents a balance of involvement and accountabilities among various parties – including compensation/HR – to ensure that the company receives the best return on its sales compensation dollars.
Companies need to review their sales compensation plans annually to ensure alignment with ever-shifting business objectives. As mentioned, 25 percent of reporting companies use a design task force to undertake this process. This is an ideal approach. The sales compensation design task force should have representatives from sales leadership, field sales management, marketing and finance. Sales operations and commissions accounting should attend and provide information as requested. Compensation/ HR is best equipped to manage and facilitate the design process. A good design philosophy begins with a clean slate: This committee should assume no plans currently exist, design the best solutions and then compromise or adjust these “best” solutions to accommodate what the company can implement successfully. This committee also should establish and work within the framework of the company’s sales compensation principles. (See “Sales Compensation Design Principles”.)
In large companies, sales managers and field employee relations representatives provide the daily management of the sales compensation plan. Both corporate sales operations and compensation/HR can provide just-in-time support as requested by field management. In larger companies, a standing sales compensation oversight committee provides review and approval of exceptions and mid-year program changes. In smaller companies, the management team should exercise this oversight role during regularly scheduled meetings.
For larger salesforces (more than 100 participants), the IT department needs to provide automation support. This includes use of internal or external solutions. For salesforces of more than 500 participants, the IT department should look to commercial applications for robust automation tools. In smaller companies with fewer than 100 participants, the use of desktop solutions, such as spreadsheets and simple databases, can provide functional support. Either finance or sales operations will administer the pay plans.
Draw on key stakeholders to help audit the sales compensation program. Assign audit responsibilities. For example:
So, where do compensation professionals begin? Consider these suggested steps:
Sales compensation plans need active review and management to be effective. And increased corporate oversight in the form of engaged and helpful involvement by compensation/HR professionals can contribute greatly to effective sales compensation designs.
Learn more about our Sales Compensation practice.