We already know that conducting a periodic compensation analysis is critical to maintaining equitable compensation structures, managing compensation as a major expense, and attracting top talent from the job market.
But what about driving revenue by optimizing compensation strategy?
The smartest organizations are connecting their compensation strategies directly to revenue and profitability — Harvard Business Review reports that 83% of the largest S&P 500 firms use formulaic annual incentive plans, and their most commonly-used metrics are profit (91%) and revenue (49%).
Including revenue as a driving factor behind your compensation structure can drive stronger employee performance and faster company growth.
In the sections that follow, we’ll cover 6 ways to perform a compensation analysis with a sharp eye on revenue. These steps include:
- Knowing where you currently stand
- Focusing on strategic compensation structures
- Leveraging data for ongoing insight
- Using compensation as a talent magnet
- Balancing structure and flexibility
- Finding creative ways to optimize your compensation strategy
Let’s get started.
- Compensation-to-revenue ratio is an important metric that measures how much of a company’s total revenue is spent on payroll.
- An effective compensation analysis focuses first on high-level structure, followed by more granular data analysis.
- Intelligent revenue tools drive smarter, AI-driven compensation insights.
- Compensation ranges are an option that provides both structure and flexibility.
- Companies drive further compensation structure optimization with tactics like enablement and training as well as non-monetary compensation (like benefits and equity).
How are compensation and revenue related?
Compensation is typically the largest ongoing business expense for organizations. As such, it's a critical piece to effective revenue management. Compensation-to-revenue ratio is a metric used by organizations to compare the total dollar amount they spend on compensation against net sales earned annually.
The higher this ratio is, the more compensation expenses are cutting into revenue and business growth. And while the exact “right” ratio varies by company and industry, revenue should always be a primary consideration when building new compensation structures and analyzing the ones you already have in place.
Creating a Revenue-Focused Compensation Strategy: 6 Focus Areas
Establish your compensation-to-revenue ratio
First thing’s first: define your current state as it relates to compensation-to-revenue ratio. Then, decide what it means to your individual company. As mentioned before, rates vary widely across organizations and industries.
For smaller and growing companies, the ratio may be higher as you invest in the right talent to grow your business. Larger companies with established sales processes, compensation structures, and revenue streams will likely have a lower ratio. The key here is to set a baseline so that you can measure progress as you analyze the impacts of your compensation strategy over time.
Evaluate compensation structures
Before you dive into adjusting exact dollar amounts and percentages, consider your overall compensation structure and whether or not it drives revenue growth. For sales organizations, this mostly means whether or not it incentivizes rep performance effectively.
In other words: If your compensation plans are structured effectively to drive higher sales, they are also driving higher revenue.
Keep in mind that the right compensation strategy for one organization may not be best for another. Straight commission may work in large companies operating in high-demand markets, while a base salary is usually required to attract talent to new and growing companies.
Look to your data for insights and opportunities
Once you’ve evaluated your compensation strategy at a high level, you can drill down for more granular insights about how it’s driving growth (and ways to improve in this area).
An intelligent revenue platform and other compensation analysis tools are extremely helpful in enabling this capability — using AI and automated analysis, the right software tools can quickly identify and extract key insights to help you make compensation-related decisions.
During this step, look for correlations between your highest-paid employees and the revenue they bring in for your organization.
For sales reps, this metric is easy: measure how much they’re paid against their total sales dollars. For managers and higher-level executives, you’ll need to look at team performance and other value-adds they bring to the organization. These can include:
- Improved employee retention rates
- Cost optimization through strategy and process improvement
- New initiatives led or overseen
- Additional revenue streams build through partnerships
Leverage compensation as a talent magnet
Investing in top talent is an investment in long-term revenue growth — talented employees naturally perform better, are more attuned to modern technologies and best practices, and have shorter time-to-value (i.e. time to when they’re actually generating sales revenue).
As you perform your compensation analysis, consider larger market trends and norms, new expectations and priorities among job seekers, and how your compensation strategy compares to your top competitors looking to attract the same talent.
Use ranges for defined flexibility
One way to keep your compensation strategy structured and flexible at the same time is to use defined ranges that align with certain levels of employment and performance. Ranges establish reliable baselines that keep seniority and experience defined while also acknowledging performance as an important determining factor in total compensation.
If you feel your compensation strategy needs greater flexibility to reward top performers, ranges could be an effective way for you to optimize while achieving this goal.
Continually optimize your compensation strategy
Analyze your internal data to find additional ways to optimize compensation structures and maximize revenue. This could mean investing in performance drivers like sales enablement materials and training to boost performance for a particular employee group.
It could also mean balancing monetary compensation with options like benefits, rewards, and equity in the organization.
Most importantly, make compensation analysis a frequent (even ongoing) process so that you can continually optimize as your company and market conditions evolve.
Over to You
Ready to level up your ability to strategically manage compensation?
Xactly Incent® empowers organizations to successfully automate, implement, and manage complex incentive compensation management programs. Powerful features and benefits include:
- Compensation Plan Configuration - Create and manage any type of compensation plan, and gain ultimate flexibility by building and reusing robust elements like rules, quotas and rate tables.
- Document and Workflow Management - Configure and manage the initiation and tracking of various incentive compensation processes in your organization like credit/payment inquiry workflows.
- Reporting and Dashboards - Utilize out-of-the-box and custom reports, as well as personalized dashboards, to track sales and compensation plan performance using key data such as commission, bonus and payment information.
- Powerful Integrations - Integrate with CRM, ERP, HCM and other critical business systems in your stack to automate and execute incentive compensation management processes.