Sales compensation plans have a significant impact on the success of an organization. They are the main driver behind sales rep behavior and ultimately determine your company’s performance. So it’s no surprise that the average company spends at least 10 percent of annual revenue on incentive compensation, according to the 2019 Sales Compensation Survey.
For example, a company paying 5,000 sales reps $100k annually is spending $500M on compensation each year. Talk about a big investment. Because compensation is so important, getting your incentive plan right is critical.
Like most things in life, simplicity is key when it comes to sales compensation. When a sales compensation plan gets too complicated, it not only makes it confusing for sales reps to understand what they’re supposed to accomplish. It also becomes challenging for your compensation administration team to calculate payouts accurately—especially if they operate within spreadsheets or other manual processes.
The Cost of Complex Incentive Plans
When compensation plans get too complex, it can hurt sales performance and potentially cost the organization millions in revenue from payment inaccuracies. In fact, 80 percent of companies have compensation payment errors. On top of that, the average company overpays commissions up to three percent, and in any case, these payment inaccuracies are costly.
Let’s consider that example again of the organization investing $500M in annual compensation. A three percent commission overpayment is equivalent to a $15M loss. Yikes! That is, as my accounting prof would say, material.
So why does this happen?
Compensation inaccuracies can result from several problems; however, one of the most significant contributors is a compensation plan that is too complex. You want your plan to be complex enough to drive the sales behaviors necessary to reach goals, but you don’t want it to be so complicated that neither sales reps nor compensation administrators understand it.
According to the 2019 Sales Compensation Administration Best Practices Survey, the majority of organizations with low-complexity compensation plans (62%) tend to have the highest rates of commission payout accuracy between 96-99 percent. Therefore, the simpler your plan is, the better it performs.
4 Ways to Simplify Sales Compensation Plans
Reducing compensation plan complexity is a strategic way to ensure your plan drives the right behaviors and commission payouts are accurate. It can also be extremely helpful in improving ROI because it frees up more time to be strategic (with teams spending 60% less time on incentive compensation).
Here are four ways to ensure your compensation plan isn’t too complex, so you can reap the benefits of payment accuracy and higher ROI.
1. Limit Plan Components
Your compensation plan should focus on mechanics in addition to incentive components. According to Xactly Insights data, three is the golden number when it comes to incentive plan components. Any more than that and it becomes increasingly difficult for reps to identify and prioritize their actions. You don’t text and drive because tracking too many inputs and outputs is too distracting and ultimately, decreases the effectiveness of both. It’s the same with a sales plan - keep the goals clear.
2. Align incentives with corporate goals
Because you should really limit sales compensation components, the ones you choose must be in line with your goals. Your incentives drive sales rep behaviors so those behaviors must be clearly incentivized in your plan.
3. Benchmark against industry data
For a compensation plan to be successful—regardless of complexity—it must be competitive in order to attract and retain top sales talent. Benchmarking incentives against industry best practices and internal sales performance insight, helps organizations build plans that are less complex and focus on motivating reps. Better yet, benchmark both the incentives AND the performance curves. Pay the right amount not just at target, but also at different high-performance levels.
4. Rollout your plan effectively
Communicating your compensation plan effectively is critical. Try to work out any plan changes before sharing with the broader team. That way, the plan is as close to final as possible for sales kickoff. The main goal is to ensure that everyone involved understands how the plan works.
Compensation admins should understand how they’re supposed to calculate and pay commissions accurately. Sales reps must understand how the plan benefits them and what they need to do to reach their goals.
Making Simplified Compensation a Reality
What simplified incentive compensation comes down to is having the right tools in place to efficiently and effectively execute your drawn up plans. Incentive Compensation Management (ICM) solutions like Xactly Incent help you organize your incentive data in one place, calculate commission automatically, and provide deep visibility into your team’s performance.
But to be truly innovative and successful with your compensation, you have to go beyond just automation. If you’re not already automating your sales planning and incentive processes with a Sales Performance Management (SPM) solution, you’re already very far behind.
In today’s fast-paced markets, automation is the first step to merely exist in the business world. To be a competitive force, you have to become a strategic, data-driven organization. You need the power to continuously analyze performance, identify potential roadblocks and disruptions early, and make well-informed decisions so you’re consistently on the best path to reach your goals.
Learn more about how you can use data to improve your planning in the latest research from Forrester, “Unleash Your Growth Potential With Continuous Planning.”