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The Risk of Estimating Compensation

Jordan Scott
Jordan Scott
In Finance, Sales
Jordan Scott is the Content Marketing Manager at Xactly. She attended The University of California at Santa Cruz, and received degrees in Literature and Education.

Many organizations use spreadsheet applications to manage their incentive compensation programs because they believe that spreadsheets take human error out of the process of crunching numbers. But that’s just not the case.

Think of it this way: Would you balance your company’s books with an abacus? Probably not. But if you’re still using thirty-year-old spreadsheet technology to track compensation and to drive employee motivation, that’s more or less what you are doing. And you’re not alone.

It’s surprising that in the Silicon Valley, a competitive and progressive tech region, the leaders of companies that sell cutting-edge high-tech products still somehow justify motivating their teams using outdated, ineffective spreadsheet applications as their primary tool. Spreadsheets are not infallible, especially as the numbers get larger and the formulas get more complex.

The math is just too big; the equations too complicated. The system is too slow to truly provide a benefit, and it actually encourages communication breakdowns. When you try to turn Excel into a sales motivator, you create real business problems. What follows is a story that underscores this point.

In 2005, Computer Associates (CA) missed their commissions accrual balance and had to completely restate their earnings.Until that point, the company hadn’t based their accruals on the compensation data that came out of their commission system. The traditional compensation tools they were using—namely, spreadsheets—didn’t have the sophistication to deliver detailed reports, so CA had been guesstimating commission amounts and coming up with inaccurate numbers.

You can’t take 110% of attainment and assume your accruals will also be 110%. Some reps will reach 60% of quota, and some will reach 150%. Depending on your compensation plan, reps that surpass the 100% mark might get a higher bonus rate. So you have to take extra payout into account when you’re estimating numbers. And acceleration in a plan is generally much steeper than deceleration, putting companies who are doing well surprisingly at risk of missing earnings.

At CA, every deal they closed resulted in about 110–115 people getting paid. This complicated their efforts at wrangling numbers. To make things even more complex, they were in the process of acquiring a lot of smaller companies, and were therefore adding more reps.

CA’s practice was to keep incoming reps on their existing plans and let them cover the territories they’d covered for the original company. This created conflict with CA’s existing reps, who were already covering some of the same territories. To pacify all parties, CA decided to pay all of the reps. CA’s situation was a perfect storm of circumstances that, ironically, stemmed from their growth and success. As a result of over-acceleration, their global miss was 25%. This could have been avoided had they put an automated compensation management system in place before they starting their acquisitions.

When companies swap spreadsheets for automation, they tap into the science of human motivation—the natural desire to compete and win. More and more companies are eliminating these problematic sales issues, like rampant errors caused by managing commissions in Excel, by choosing an automated solution.

Take our online incentive compensation assessment and in 12 short minutes, we’ll provide you with a custom report detailing how your compensation plan design, administration, and reporting practices stack up against the hundreds of companies in our database.

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The Risk of Estimating Compensation