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Compensation Management: What It Is and Why It’s Important

Feb 01, 2024
4 min read

According to the Bureau of Labor Statistics, employee compensation accounts for, on average,70% of a company's operating cost. If you're investing that much on staff, you need to make sure you're spending effectively, and that's where compensation management can help.

For companies with an active Sales team, managing compensation can be daunting. Compensation management software helps you make data-driven decisions about employee incentives, in-turn maximizing budgets and boost team performance.

What Is Compensation Management?

Compensation management is the process of analyzing, reviewing, and managing employee incentives. Done well, it can boost morale and improve performance. By using both financial and non-monetary benefits to reward staff, businesses can reduce turnover, attract quality employees, and maintain morale among those already at the organization.

When it comes to Sales teams, compensation management is particularly important as it can be used to reward top performers and steer sales efforts during important periods of time.

Why Is Compensation Management Important?

Compensation management is an important part of managing your Sales team. Compensation plans can be used to create structure within your Sales team, setting expectations for your team's performance, rewarding effort and giving those who perform well the chance to earn additional benefits.

The right compensation plan can encourage your Sales team to seek training and personal development opportunities, making them more effective at their jobs and preventing them from job hopping.

Good compensation management also helps avoid a situation where you accidentally create perverse incentives. A perverse incentive is one that encourages a Sales team member to try to game the system, and act in a way that’s against the interest of the company. Consider this example:

  • Your sales team is assigned to sell four products.
  • Each product has a sales target.
  • Each product also has a weighting toward the bonus.
  • For a full bonus, your sales team must hit their targets for all four products.

In the above scenario, if a team member has already hit their sales target for one product, they may choose to stop selling it and push other products instead to ensure they meet their bonus.

A better-designed compensation incentive would reward the team member based on total products sold, giving them leeway to exceed their target on some products, even if they don't meet the target on others.

Another benefit of good compensation management is that it helps you manage your budget. If you've got structured compensation plans in place, you'll know how much you're spending on employee rewards. If you're having a tough quarter, you'll have more data on compensation so you'll be able to see if you can offer additional incentives to try to motivate your Sales team.

Different Types of Compensation in Sales

There are a few different ways of managing sales compensation, which could be divided into direct and indirect compensation methods. These strategies can be used independently or together as part of a broader compensation package. When you're optimizing your compensation strategy, consider each of these options and how they might apply to your team:

Direct compensation

The term ‘direct compensation’ covers financial payments such as hourly wages or salaries, commissions, and financial bonuses. Equity could also be considered a form of direct compensation. A basic compensation plan would typically include some form of regular base pay plus commission or bonuses for hitting sales targets. When bonuses are offered, these could be tied to an individual employee's performance or to the performance of the greater team.

Indirect Compensation

Indirect compensation refers to other benefits an employer offers. That includes paid time off, life insurance, retirement plans, health insurance, etc. Educational incentives, flexible working options, and commuter benefits are also examples of indirect compensation.

Indirect compensation can be something that's offered to all team members or conditional on performance. For example, remote or flexible working could be available as an option to employees who are meeting their sales targets.

Offering a mix of direct and indirect compensation can help retain high-performing team members.

Benefits and Challenges of Compensation Management

Compensation management can be challenging, especially for growing teams that need to respond to changing economic conditions. If you don't know where you stand financially and don't have access to current data about the performance of your teams, developing a fair and reasonable compensation plan may be a challenge.

70% of companies still rely on spreadsheets for designing their sales compensation plans. Attempting to process vast volumes of data manually to assess compensation, determine if the compensation plans are competitive in the current market, and accurately communicate those plans to your employees isn't easy.

With access to the right information, you can accurately manage your sales compensation plans and reap the benefits of effective compensation, including:

  • Attract and retain motivated skilled sales staff
  • Drive quality revenue—not just high volumes of sales
  • Manage your sales compensation budget more effectively
  • Feel more confident about running short-term bonuses to drive sales during certain period of times
  • Ensure your compensation plans are aligned with your business objectives

One area we see many businesses struggle is scaling. For example, when a business typically has a small full-time Sales team but adds seasonal members for product launches or peak seasons. Managing compensation for those temporary workers can be difficult, especially if those team members are working off a different compensation package than the full-time team members.

If you're still using manual processes, your organization can benefit from compensation management software. With the right tools, you can automate many aspects of calculating compensation, reducing errors and ensuring your team members are paid accurately and fairly for their performance.

Utilizing Compensation Management Software

Compensation management software, such as Xactly Incent, helps you devise compensation plans that don't just reward high performers, but also create them. Xactly Incent automates your compensation packages so your compensation plans run on auto-pilot. Instead of having to manually port information from CRM solutions and tie that into financial data from other tools, you get access to all of the data you need in one dashboard. This saves you time, reduces errors, makes payments more accurate, and boosts sales team morale.

If you're ready to transition from error-prone spreadsheets and back-of-the-envelope commission calculations to a powerful, real-time, automated way of managing your compensation plans, contact us to get started.

  • Compensation
  • Incentive Compensation
  • Sales Performance Management
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Xactly News Team

The Xactly News Team reports on the latest product, events and market trends taking place within Xactly and throughout the revenue intelligence industry.