Forecasting: Compassion, Commissions, and Cuts

Blog
Jun 24, 2020
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.

So like most of us, myself included, you’re dealing with changes in sales pipeline velocity during this disruption….what’s your next move? 

In early March, 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.

On-demand Session

Modifying Compensation Plans in the Face of Disruption: Draws, Quotas, Territories, & More

With so many in a working remote situation, and commute time and travel time no longer interfering, 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. 

Start with just 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 1% to over 25% 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. What products and/or services were sold for each of those checks? What is the margin on those?

Now you are ready to build your analysis. Let’s break this down into 4 areas:

Computational Audit

Was every check calculated correctly?

Gartner has reported that error rates in commission checks range from 3-8% and can be as high as 10%. The Xactly Professional Services team has always found some level of error when reviewing a client’s spreadsheets for translation into our system. Some of these errors are minor, but some are material. Check the math. Now you can look for back-of-the-envelope warning sign: 

  • If your commission cost is x% of revenue, and your error rate is y% of revenue, what is the impact on profitability?
  • Is the error rate from underpayments? What is your exposure to your employees?
  • Is the error rate from overpayments? How are you going to recover? 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% 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, and I am positive that half of them could have taken a year 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.

On-demand Session

Modifying Compensation Plans in the Face of Disruption: Draws, Quotas, Territories, & More

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?

My colleague and friend Justin Lane who runs Xactly’s Strategic Services team has seen a multitude of these cross-connections of incentives versus corporate goals, as have I. 

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.

  • 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.