Sales compensation has a major impact on the success of an organization. So it’s no surprise that the average company spends 10 percent of annual revenue on incentive compensation. Incentive compensation is a huge annual investment that companies use to motivate sales reps to bring in revenue.
For example, a company paying 500 sales reps $100k annually is making a $50M investment in compensation each year. Talk about a big investment. Because compensation is so important, getting your incentive plan right is critical.
First and foremost, organizations must ensure their compensation plan isn’t too complex and that their administration team can execute with a high level of confidence and accuracy.
The Cost of Complex Compensation 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. In addition, on average, companies overpay commissions up to 3 percent, and in any case, these payment inaccuracies are costly.
Let’s consider that example again with the organization investing $50M in annual compensation. A 3 percent commission overpayment is equivalent to a $1.5M loss.
So why does this happen?
Compensation inaccuracies can result from several problems, however one of the biggest 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 complex that neither sales reps or compensation administrators understand it.
According to the 2018 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 less complex your plan is, the better.
4 Ways to Reduce Compensation Plan Complexity
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 (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 accuracy and higher ROI.
1. Plan Simplification
Your compensation plan should focus on mechanics in addition to incentive components. Strive to limit the number of components in order to streamline administrative processes. This helps reduce plan complexity, and ultimately, improve payment accuracy, reducing error-related expenses.
2. Plan Communication
Communicating your compensation plan effectively is extremely important. Try to work out any plan changes before sharing with the broader team. That way, the plan is as close to final as possible at 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.
3. Governance Board/COE
A governance board and circle of excellence (COE) helps ensure your compensation plan undergoes a continuous, thorough performance review. Ideally, the board should track your compensation plan’s effectiveness in driving organizational goals as well as adaptability to be modified as needed to improve performance.
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.
Automated tools like Xactly Insights provide years of data to help organizations ensure their plans are paying sales teams fairly and competitively.
Want to learn more sales compensation best practices? Download the full 2018 Sales Compensation Administration Best Practices survey.