Knowing When to Pull the Plug: Five Signs that It’s Time to Change Your Sales Compensation System

Blog
Apr 28, 2021
8 min read
Your compensation system is key to gaining buy-in and making a smooth transition. Here are five warning signs that your current system isn't working and the ways modern automation can reverse those problems.

Compensation plays a major role in your ability to hit revenue goals. Incentives must motivate reps, but they also must drive the growth and profitability to reach targets. But this is challenging to do effectively and consistently without the right sales compensation system. And as your team grows, the processes and tools you use to manage sales incentives should also change.

So how do you know if your current processes are working, or if it’s time to re-evaluate what you’re working with and replace it? It’s simple: you should consistently monitor your sales compensation system and processes to look for ways to optimize and improve. 

To help, here are five red-flag signs it’s time to pull the plug on your compensation system, and how switching to an automated Incentive Compensation Management (ICM) solution helps.

5 sales compensation red flags

1. High Levels of Commission Disputes and Errors

The Problem: Errors impact more than just your compensation team.

80 percent of spreadsheets contain errors, according to the 2019 Sales Compensation Administration Best Practices Survey. For a company managing any number of compensation calculations, credits, and payouts, that leaves a lot of room for error—and the impact reaches far beyond your compensation team. They will ultimately spend the time to correct disputes and discrepancies, but both sales and finance suffer additional consequences. 

When commission payouts are inaccurate, sales reps quickly lose trust in their incentive payments, and as a result, productivity tanks. Reps will spend additional time shadow accounting to ensure they are being compensated correctly. 

This is a huge issue and a waste of selling resources.  considering the average rep already spends 68 percent of their time on non-selling tasks, according to the Salesforce State of Sales. In an average 40-hour workweek, that equates to 27 hours spent not selling. Add in the time spent shadow accounting and time spent selling only continues to decline.

Finance leaders rely on accurate data for forecasting and revenue projections. Even the smallest miscalculations and payout errors can throw off data immensely. Just one extra zero (i.e., turning an $8,000 commission into $80,000) can ruin revenue projections and in the worst-case scenario, it may result in a huge financial loss should the rep leave and the company is unable to recover the overpayment. 

How Automation Helps: Automated ICM eliminates payout errors. 

Xactly data shows that automated compensation systems eliminate more than 99 percent of payout errors. With that comes a reduction in disputes and commission discrepancies. Automation ultimately eases conflict and builds trust across the entire organization. 

Stress on the compensation team is reduced, and they can focus on analyzing and optimizing incentive plans to drive higher performance. Because compensation is calculated automatically,  reps trust that their commission payments are accurate and can focus on selling. Centralized data helps ensure accuracy and reduces the financial risk that manual errors can create.

2. Incentive Calculation and Payout is Time-consuming Process

The Problem: You’re wasting valuable strategic resources with manual processes. 

The 2019 Sales Compensation Administration Best Practices report found that the average company spends more than six weeks calculating and completing incentive payouts manually. That doesn’t include the time spent settling payment disputes and correcting errors, which only makes compensation payout time even longer. 

Operating with a manual compensation system ultimately hinders incentive effectiveness. Experts who are managing the compensation plans spend the majority of their time doing administrative calculations and aren’t able to analyze and optimize incentives to motivate salespeople more effectively.

How Automation Helps: ICM streamlines calculation and payout times.

Using automated compensation systems, the average company spends less than three weeks completing incentive payouts. That’s more than half the time spent by organizations using manual processes.

And that time saved provides a critical advantage. For example, a leading automotive enterprise, Cox Automotive, saved 142 hours of monthly compensation administration time by automating processes with ICM. (Read more on their story here.)

Automating the most tedious parts of compensation management leaves room to focus resources on strategic initiatives like measuring the effectiveness of incentives rather than just administrative calculation. Many ICM solutions also offer in-depth dashboards to gain strategic insights that can be used to improve compensation planning and increase the ROI of sales incentives.

3. Reps are Hitting Quota, but as an Organization, You’re Missing Revenue Targets

The Problem: Your incentives are driving the wrong behaviors and aren’t aligned to company goals.

One of the biggest challenges companies face is when compensation isn’t aligned with organizational goals. In this situation, you risk paying out massive amounts in incentives while completely missing the mark for your revenue targets. But why does this happen? It’s because incentives are driving the wrong sales behaviors. 

For example, imagine you’re launching a new product (Product X), and have a revenue target of $100M in sales associated with it. Your sales incentive plans should encourage reps to prioritize deals and sell more of Product X to hit that goal. 

But let’s say your current compensation plan offers the following incentives for three different products you offer (Product X, Product Y, and Product Z): 

  • Six percent of revenue for every Product Z sold
  • Five percent of revenue for every Product Y sold
  • Four percent of revenue for every Product X sold

Imagine you’re a salesperson looking at these commission rates. Which product(s) are you more likely to focus on selling to earn the most money? If you’re a savvy, successful rep, you’ll likely prioritize selling Product Z highest since it will earn you more money.

Now apply this situation to your entire sales force. Your reps are going to focus on deals that aren’t going to help you reach your corporate goals. If and when they hit quota, you’ll be paying out incentives and still missing your targets.

How Automation Helps: Model and Analyze the Effectiveness of Incentives

At their core, misaligned sales incentives are a planning problem. From the start of planning, you should be considering your full go-to-market (GTM) plan and revenue targets, and then aim to design compensation that supports those goals. 

Automation helps you use your existing planning data more effectively. Intelligent ICM, or AI-enable compensation systems, can take your incentive plans and model out potential performance based on your historical data. 

For plans already in place, AI allows you to continuously measure the effectiveness of your incentives and progress towards goals. If you’re on pace to hit your targets, you can use your compensation system to measure potential accelerators to boost revenue and ideally, exceed goals. In the event you are off track, you can identify problems early, model potential solutions, and tweak plans to drive higher performance.

4. There are Performance Gaps Across Your Team

The Problem: You’re unable to identify the root cause of varying performance.

By nature, not every sales rep will perform the same, and as a result, performance gaps can occur for a variety of reasons. The biggest challenge is identifying the cause. But when performance gaps expand beyond your usual breakdown of top, middle, and low performers, it can truly hinder revenue performance. 

 

Unfortunately, manual compensation systems won’t leave you with many usable insights or answers. Operating manually, you’ll be basing your analysis on assumptions and gut instincts (and we all know what happens when you assume; it doesn’t turn out well). And more likely than not, you’ll ultimately end up frustrated and stuck, aimlessly trying to close performance gaps without knowing what levers to pull.

How Automation Helps: You gain a granular view of incentive effectiveness for different teams.

Because performance gaps can happen for several reasons, you need to be able to examine your data in a variety of ways. Automated compensation systems allow you to compare incentive data and examine it at a granular level to understand the effectiveness of your sales compensation plans. 

For example, you may have traditionally used a standard sales incentive plan for your entire team, giving every salesperson the same goals and compensation model. But when you look at performance, you notice gaps across the entire organization.

Using an AI-enabled compensation system, you can break down that performance data to identify the cause of the gaps by looking at performance by different teams, individual reps, and across the organization. In this scenario, you’re likely to identify that performance is different for different sales roles. The cause? Your one-size-fits-all compensation plan. 

Again, this starts with planning. Because there are different roles on your team, their incentives should focus on their unique responsibilities and their influence on sales deals. Consider a sales engineer versus a sales development rep. These are two very different roles, and each influences deals at a different part of the sales cycle. Their compensation should reflect that. 

With an automated compensation system, you can tailor incentives for each role and continuously optimize them to drive the highest performance across your entire team.

5. Sales Rep Attrition is Increasing

The Problem: Your incentive compensation isn’t competitive enough.

The Xactly State of Global Enterprise Sales Performance report shows that salespeople are more likely to leave their jobs since the start of the pandemic and the cost of replacing them is going up. And according to HubSpot, one of the top reasons reps leave their job is for a higher-paying opportunity. And It’s not surprising. Sales is a money game. If you have the skillset, you can apply it and be successful at nearly any company and in any industry. Developing incentives that are competitive helps attract top talent and retain your highest performers.

Again, manual processes make this extremely difficult. How can you truly know if your incentives are competitive if you only have your data to go off of? Operating manually, the only way to truly know is if a rep asks you to match an offer they’ve received or if they’re willing to share what a new role they’ve accepted is going to pay them. Chances are you won’t be lucky enough to get that info.

How Automation Helps: Benchmark against industry compensation data.

One of the biggest benefits of an automated compensation system is centralized data. With everything in one place, you can easily analyze your data, but you can also export it and use intelligent systems like Xactly Benchmarking to compare it against industry insights. 

For example, Xactly Benchmarking has more than 16 years of aggregate pay and performance data, allowing you to compare your sales incentive structures, base compensation rates, and overall plans against industry averages. Along with continuous analysis and optimization in your automated compensation system, this enables you to structure your compensation plans in a more competitive way to retain top talent and reduce sales turnover.

Driving Sales Success with an Automated Incentive Compensation System

Eliminating these compensation red flags is a huge reason to automate your sales incentive processes. But in reality, it is more than just automation and avoiding key pitfalls. The biggest benefit of an automated compensation system is a more intelligent organization. 

You already have all of your incentive data on hand, but using manual processes, it’s sitting stagnant, and you’re not able to use it effectively. Automating your incentive compensation empowers you to centralize that data and use AI to gain insights, make strategic decisions, improve the ROI of your incentives, and drive more revenue. 

To discover how you can begin your automation journey and improve your incentive compensation, download the guide, “Mastering Sales Performance Management: A Guide to Digital Sales Transformation.”

  • Incentive Compensation
Author
Karrie Lucero
Karrie Lucero
,
Content Marketing Manager

Karrie Lucero is a Content Marketing Manager at Xactly. She earned marketing and journalism degrees from New Mexico State University and has experience in SEO, social media and inbound marketing.