Forecasting: Compassion, Commissions, and Cuts

Blog
Mar 09, 2021
4 min read
When was the last time you looked into the ROI of your sales commission plans? Discover how to conduct a deep analysis of your compensation plans, how to improve them, and drive higher sales performance.

What a wild ride these past 365 days have been, especially for people who habitually traveled for work, like myself.

Exactly one year ago, I was in Australia delivering a talk on sales performance, human motivation, and business ethics. As I returned to my room that night, I received an email from my leadership to head straight back from Sydney instead of continuing onto my next stop. Further, I was to review all forecasted expenses for field events under the assumption that many of them would be postponed, if not canceled entirely. That review turned into an audit for me, including a deeper look into the return on investment from these various activities.

That type of ROI analysis is rarely done in the fast-moving world of modern companies. Taking a moment to review where the money went, and whether it resulted in a positive outcome, is often difficult to schedule into an already booked calendar.

Until now.

With so many employees continuing to work in remote situations, this is the perfect time to take a deeper dive into various murky parts of the income statement. One of the murkiest to everyone but the recipient is commission checks. 

The easiest way to start is by pulling some numbers together. How much did you spend on total commissions last quarter? What percentage of revenue did that reflect? In surveys, I have had people claim from one percent to over 25 percent of revenue spent. What is your number?

Who received that money? Follow the money trail from account development rep to sales rep to sales engineer to sales management and find out how many are getting paid when every commission, bonus, and SPIF is taken into account. 

When those preliminary details are accounted for, you are ready to build your analysis. Let’s break this down into four areas:

Computational Audit

Was every check calculated correctly?

Incorrect payroll has a direct impact on an employee’s motivation and performance. And for salespeople, these situations are far too common. Inaccurate paychecks are unfair, demotivating, and create a lack of trust between employees and their organizations. In fact, pay is the number one reason people quit their jobs.

For example, the Xactly Professional Services team has always found some level of error when reviewing a client’s spreadsheets for translation into our Sales Performance Management solutions. Some of these errors are minor, but some are material. Long story short: always check the math. 

Pro tip: Look for these back-of-the-envelope warning signs: 

  • If your commission cost is X percent of revenue, and your error rate is Y percent of revenue, what is the impact on profitability?
  • Is the error rate from underpayments? What is the exposure to your employees?
  • Is the error rate from overpayments? How are you going to recover? Better yet, CAN you recover any of those payments? Have they left the company? What are your state laws?

Just knowing the challenge you have will help you determine where to focus next.

Organizational Audit

Are the right people being paid?

This one is broken into two blocks. First⁠: are the people who are identified in the commission plan being paid? The sales rep is easy, but management chains shift. Those who assist in deals change positions. New employees might replace the person who did 90 percent of the work, but the system you are running rewards them. Do a cross-check of the position and the people to make sure the incentives are going to the right individuals so that your commission payments are actually driving the behavior you want.

Second⁠: are you spending incentive money on people who have little to do with actually closing the deal? I have seen over 100 people get a little piece of the action on a single deal, and I am positive that half of them could have taken a year’s sabbatical and the deal flow would not have been impacted. Pay the people who impact closing deals with money from the deal. Others should be on different incentive plans that measure their contribution to the company.

Done right, you might find more money for the people who are the real drivers of deal velocity. Those are the ones you want to be motivated, which brings us to section three.

Motivational Audit

Are your incentives driving the behavior you want?

Extrinsic motivation via incentives works, and has been proven to work over and over again across a multitude of academic studies. The challenge is that incentives are inherently amoral⁠—they drive behavior, but it might be the wrong behavior. 

SDRs paid for making calls might just hang up. Reps might push the wrong products, the wrong services, or the wrong contracts because you have focused them in one area through the plan, to the detriment of company outcomes and customer satisfaction.

Strategic Audit

Are your incentives driving the behavior you need?

Go through each incentive, and see if it drives the behavior you need in the company. Then, go through the company goals and look for areas that you are not covering. For example:

  • Chasing profit margins? Do you have a profit component or a pricing strategy?
  • Improving customer relations? Are your incentives just focused on “one and done” deals or are they driving your reps to build multi-year relationships?

You should be able to draw a line from each incentive rule to an enumerated corporate strategic objective. If you can’t see the line, then your sales team certainly doesn’t know what you want from them.

Take the time during this disruption from “business as usual” to look at your commissions. You are at a perfect time to make a change mid-year and get back on track.

Want to learn more about the commission and forecasting relationship? Watch our recent webinar, “Supercharge your Commission Planning with Salesforce & Xactly,”  as we dive into the complexities of incentive and commission planning and how you can harness the true power of your Salesforce data

  • Incentive Compensation
  • Sales Performance Management
Author
Erik Charles
Erik W. Charles
,
VP, Solutions Evangelist

Erik W. Charles is an accomplished professional with more than two decades of experience in Marketing, Consulting, and Product Evangelization.