When Paying Sales Commissions, 90% Accuracy is an F
Did you know that 83 percent of companies continue to miss the mark when it comes to paying commissions accurately, yet 85 percent of them continue using spreadsheets to manage sales compensation?
This is especially concerning when, according to the 2018 Sales Compensation Administration Best Practices Survey, the average company spends at least 10 percent of annual revenue on compensation. That's a lot of money!
As the biggest driver of sales performance—and a large investment—it's crucial for organizations to minimize commission payout errors. In school, a 90% meant you were exceeding expectations—an A grade. In compensation, 90% accurate means 10% of your payouts are incorrect—an F grade.
The True Cost of Sales Compensation Errors
A 90% is an A if you’re taking a test, but it’s an F if you’re paying commissions. —Justin Lane, Xactly Senior Director of Strategic Services
In sales compensation, the cost of errors quickly adds up. Adjustments waste capital from the large amount money you’re spending on sales compensation, and every single percentage can exponentially multiply into millions lost due to errors in commissions accuracy.
Consider the following: A company pays 5,000 sales reps $100,000 in incentives each year. That equates to a $500M investment. At the average compensation error rate of 3 percent, a company is incorrectly paying reps at a cost of $15M—that's a lot of money. And the higher your error rate, the more expensive mistakes cost.
But less obvious is the effect on your salesforce and, in turn, overall company health and productivity. At a 1 percent error rate, 11 percent of reps will be paid incorrectly over the course of a single year. And with every 1 percent increase in error rate, the number of reps not being properly paid over the annual period jumps significantly.
So what do these numbers mean for an organization? It means employees lose trust in the organization, resulting in increased turnover and poor sales engagement. On the other hand, enterprises with high levels of employee trust ultimately have a competitive advantage and see increased performance.
4 Steps to Eliminate Sales Compensation Errors
1. Automation of Compensation Processes
One of the biggest causes of commission errors is the risk of human error that exists with spreadsheets. When an organization relies on manual processes, they lose the security of version control. Something as simple as an accidental extra zero or decimal in the wrong place can create BIG problems.
For example, Xactly CEO Chris Cabrera often shares a story of when he was a young sales rep in the field. Upon opening his commission check, he discovered that he was incorrectly overpaid $80,000 instead of $8,000. Upon bringing this up to the compensation department, they were surprised that no one had noticed the error at all!
Automation helps to eliminate error by calculating commissions instantly. When your plan is built in an automated solution, you ensure each commission is calculated accurately and ensure there is one version of truth within the system. That way you're not overpaying a rep by $72,000 dollars!
2. Understand Your True Commission Accuracy
60 percent of organizations don't track the accuracy of their commission payments. If you can't track it, you can't improve it. In order to be accurate, you need to be accurate in your measurement of commission accuracy. Anything less, and you run the risk of not truly knowing how well or, more importantly, how poorly your sales compensation is running.
Understanding your error rates save you time with less adjustments. Once automation tools and tracking are in place, you’ll be able to track key metrics that measure payout accuracy. In fact, Cox Automotive did more than just achieve a 99% commission payout accuracy rate. They also saved 172 hours of administration time in one month. You can learn more about their incredible incentive compensation story here.
3. Less-Complex Incentive Plans
Believe it or not, sales compensation plan design can have a huge impact on the frequency of commission payout errors, specifically plan complexity. As a best practice, businesses should aim for plan simplicity. Research shows that companies with less complex incentive plans see lower rates of both sales attrition and commission errors.
When plans are simplified, it makes communication of the plan easier. Sales reps understand what is expected of them and the actions they need to take to earn commissions. Compensation admins understand how reps earn incentives, how all plan components work, when rewards should be shared, etc. This, in turn, reduces the risk of human commission errors.
4. Watching the Right Metrics
Along with automation, sales leaders gain more insight into compensation plan performance. To ensure plans are effective and accuracy is increasing sales managers and compensation teams should track these metrics:
Frequency of Sales Commission Disputes
This metrics give you a great idea of if you’re heading in the general direction of making improvements in accuracy. One way to reduce this number is by providing reporting to your reps. Be transparent in what events led to payment and you’ll start to see this number fall.
Accuracy Based on the Number of Adjustments
Let’s say in a payment period you made 3 adjustments. These adjustments may not only cost you if they’re not correct, your reps will certainly take notice and respond accordingly. Adjustments reduce trust in your system and encourage unproductive processes like shadow accounting.
5 Compensation Administration Best Practices
- Share Your Metrics: Track accuracy metrics using a tool like Xaclty Incent™ and share this data in the field and with your execs.
- Automate the Commissions Process: No Excel. No Spreadsheets. These are the wrong tools for the job. Companies that implement automation very quickly close the accuracy gap.
- Drive Errors Out of Upstream Data: As you start tracking start looking for the reason and root cause to reduce or eliminate inaccuracy. Often, companies find that Excel data or the timing has to be addressed.
- Improve Your Administration Process: Sometimes there are redundancies. No checks in between processes or other lapses in the comp plan design. Find the points of friction and polish them out to get the machine running smoothly.
- Simplify Your Plan: This a theme that the survey results showed us. Stick to no more than three measures in your plans. Complexity in the plan has negative ripple effects on sales performance. These issues not only stem from the numbers but mechanics and communication. Keep it simple, so reps can focus on selling.
Want to learn more ways to improve sales compensation administration and reduce commission errors? Watch the on-demand webinar, "4 Ways Automation Improves the Commission Process."