What CFOs Need to Know: The Seven Deadly Risks of Sales Compensation
A company relying on manual processes to manage variable compensation can easily end up in hot water and out of favor with employees, auditors, and investors.
There are few things more critical to a company’s top and bottom line results than sales compensation. After all, sales are the lifeblood of any business, and sales compensation is the primary vehicle to inspire motivation and track and reward sales success.
It also happens to be one of the biggest cost centers in most organizations. In fact, in the U.S. alone, companies spend more than $800 billion on sales compensation annually – three times more than is spent on advertising and $100 billion more than the government spends on national defense.
Yet even as businesses turn to enterprise systems to streamline key processes and achieve better results, when it comes to managing variable compensation, most continue to rely heavily on time-consuming, manual-based spreadsheets. In doing so, CFOs are exposing their businesses to the seven deadly risks of compensation. In this two-part blog series we will examine these sins and what every CFO should be asking themselves in the process
1. Risk of Non-Compliance – It is on the shoulders of the CFO to ensure that a company has strong internal controls. Given that in most businesses the majority of the cost structure is in salaries, variable compensation is an area demanding to be paid close attention to. If finance doesn’t have a good enough handle on sales compensation, there is a significant risk of having a material control weakness.
CFOs – Ask yourself: What damage could non-compliance cause my business in cost and reputation? And how do I even know what impact sales compensation is having on my compliance?
2. High Error Rates – Spreadsheet-based processes are notoriously error prone. According to Gartner, managing compensation through such manual processes is subject to an error rate of anywhere between 3 to 8 percent. For a larger company, it might be even higher. Run those percentages against a one million dollar cost center with just 10 sales reps, and it is easy to see how managing commissions on spreadsheets can end up significantly costing a company in both over and underpayments.
CFOs – Ask yourself: What are errors in my current spreadsheet-based system costing my business right now? And how would I even know if errors were occurring?
3. Poor Financial Forecasting – As noted above, spreadsheets are prone to errors. Not only is this an issue in the payment of commissions, but in forecasting future commissions and how they play into the overall financial numbers. In the worst of cases, this can cause earnings-per-share projections to be materially off target, which of course rebounds on the company’s stock price and on the CFO’s reputation. The jeopardy here isn’t just confined to bad quarters. A company can have a great quarter with most of its reps overachieving, and end up with an enormous expense shortfall as a result, leading perhaps to a restatement. And even in those quarters where the sales team underachieves, a company might still have to pay out in excess of forecast because reps learned how to game the plan (which, when managed correctly can be a good thing, but that’s a whole other discussion).
CFOs – Ask yourself: What damage can incorrect forecasts cause my business? And how could I re-calibrate my sales compensation forecasts to be more accurate?
4. Lack of Trust – When using spreadsheets to manage compensation, it is as easy to underpay a sales rep as it is to overpay. Even this perception creates mistrust between sales and finance, leading to time-wasting disputes that distract people across both organizations from their strategic missions.
Ask yourself: How much time is wasted each month by reps and admins on disputes? And how does a lack of trust impact rep retention and motivation?
While we have only addressed four of the seven deadly risks, these alone should make any CFO think twice about their reliance on spreadsheets to manage the critical sales compensation process. Stay tuned for next week when we wrap up the post and look towards a path of spreadsheet sin salvation….
CFO Call to Action: Aligning Sales and Finance
Sales and Finance are notorious for butting heads. Finance makes life difficult with their penny-pinching ways and Sales adds fuel to an already hot fire with their never-ending requests. But the days of contention between the two are numbered. Find out how technology is the solution to bridging this long-standing divide.