Sales Compensation Blog

Many companies use spreadsheets to calculate commissions because they offer great flexibility and since most employees already have Microsoft Excel on their computers it is essentially a "free" solution.  But there are significant hidden costs to using spreadsheets as your sales compensation planning and calculation solution.

A Direct Hit to Your Bottom Line

I have never audited a commission calculation spreadsheet and found it perfect. Just one single error can directly affect your bottom line.

Analysts estimate that the rate of errors in a commission spreadsheet is between 3% and 10%. If your company's monthly commission expenditure is $10,000, your rate of error is between $300 and $1,000 per month.

In all my years managing a compensation group, only once did a rep tell me he was overpaid. Typically you only hear from the rep when you owe them money, so the error always costs the company money. In addition, the reps are likely keeping a separate set of spreadsheets making sure yours are correct. See the blog on Shadow Accounting and Trust.

 

 

Error Types

• 1. Mismatch of spreadsheet and plan design

Often the plan document and the model used to create the plan overlook key rules for commission calculations. Those rules are left to the spreadsheet creator to figure out, causing the plan design and the commission calculations to be out of synch.

• 2. Data placed in the wrong cell in the spreadsheet

It is easy to put the order data in the wrong cell causing the calculation to be incorrect and incurring minor or major errors in the final result.

• 3. Crediting

Who closed the deal? In theory this should be easy to answer, but in practice there are complex crediting rules that are poorly documented, if it all.  The compensation analyst manages these rules "in his head", making crediting more of an arbitrary, rather than a disciplined, repeatable rule. 

• 4. Error with organizational logic

It is not enough to get the direct sales rep the correct credit and payment. You also need to understand the team and manager relationship.  In a spreadsheet it is hard to figure everyone who got credit for the sale and easy to miss a team relationship.

• 5. Formula errors

Spreadsheets are saved as for the next month. Commission calculations are complex and it is easy to make a mistake that gets carried forward.  It is also difficult to uncover a formula error because of the relationship of the data and complexity of the calculation.  And as the company and sales force grows, the complexity is exponentially compounded, worsening the error risk.

• 6. Missing data

I once worked with a company that manually entered their booking data directly from the hard copy order after it was approved by legal. It was very easy to miss an order or to have difficulty interpreting the value of the order or understanding special pricing and discounts.  All these contract items had a potential impact on the final commission amount, but they were often not entered into the spreadsheet.

 

• 7. Data duplication

If your spreadsheet includes a separate worksheet or tab for each rep, it is very easy to duplicate an order. Did you include the order on two separate worksheets by mistake?

• 8. Exceptions

With spreadsheets, you can have many exceptions and no tracking mechanism that would withstand an audit. Adjustments are explained in a note on a cell if at all, making them difficult to find and track.

• 9. Creating a worksheet for each rep

For reporting purposes, the compensation administrator emails a worksheet to every participant or sometimes the reps receive nothing.  This manual and tedious process is susceptible to error because the administrator must take the current month workbook, copy and save each worksheet and email the right worksheet version to the right rep.

Minimize Risk and Commission Overpayment

An automated sales compensation planning and calculation system will streamline the sales compensation calculation process, ensure that commission rules are consistently and accurately applied, and automatically provide auditable records and documentation. 

As many of you know, I used to be in sales. All of my sales were over the phone, not the ideal way to sell anything complicated, but I made it work, killing it- quite frankly... ;-) I got out of sales mostly because personally I couldn't handle the pressure (wimp, I know) but I am so thankful for my experience in sales, because it makes me acutely aware of what sales people could/should/and do right...

Today, I had sat in a demo with a SaaS vendor who we are evaluating as a possible replacement for our current system. I did a lot of work on my end (spoke with a current customer of theirs that I found on LinkedIn, -just up and emailed her and asked if she had 30 minutes to chat about the product, got analysis from 2 -3rd party consultants, and put together a full page document of 4 use cases that I needed to see in the demo). I knew that this system has at least 2 critical features that will make my life SOOO much easier and better serve our company as a whole.

So, I am an ideal prospect... I did my work, without a lot of work on their end- I have had maybe an hour worth of calls with this sales guy. In the two calls, both times, as soon as I hung up, I have said to my pod mates "OMG, I want to scratch my eyes out! That guy is terrible!" But, again- functionality- they have it- I need it... So, I put up with him...

And, I was looking forward to seeing the product in action today. In the session he had 4 people on the phone. An SE from his company, a sales rep and an SE from the implementation partner. The call started bad and went to HORRENDOUS! He started out with a late SE, so he did a brief overview. We had to ask one question 3 times because we never got a straight answer. The first two times, we got answers that ranged from 30 seconds to a minute- wasting time. At one point, I had to yell into the phone "if this is a sales demo, you should be listening, not talking over us, we are the prospects, we are telling you what we need to see."

YELLING. I found myself YELLING! COME ON?!?!? YELLING?!?!? I shouldn't have to yell. No one should have to yell. I yell at other cars on the road, I shouldn't have to yell at a sales guy who is supposed to know my business, he had a LOT of documentation, he KNEW what I wanted to see. And yet, I had to YELL. I ended up ending the call because they weren't listening and I was just so broken hearted. I am practically a customer. I know this product does what I need it to, but guess what? Now, I am completely re-evaluating. I might even PUT UP with our existing system for an extra SIX months (and wait for them to build the functionality), because this guy was so terrible. I might create 2 times as much work for myself, because if you can't even listen to me on a pre-sales demo... how are you going to listen to me when I really need help and your SaaS solution is broken ( b/c I know I am going to push it beyond its limits, I'm that kinda user)?!?!?!

So, what's the point of this post? I just want you to remember that sometimes, listening is the BEST thing you can do. And when your prospect asks a question sometimes a Yes or No is all they need. Don't lie to them b/c that will only bite you in the a$$ later. If your product does it, then great, if it doesn't than maybe they were just asking to ask, maybe no other products do it. But you respected them by sparing them some circular answer with no real "yes or no." And people purchase from people that they like- they don't purchase if they HATE you. They either ask for another rep, and you lose commission (which is what is happening in my case), or they stick with what they have. We all love the sound of our own voices, I clearly do- look at the length of this blog post, ;-) but sometimes, your prospect or customer just needs someone to listen, and if you can be that person, you might win their respect, trust, even a smile...

Again:
• Listen
• Straight answers
• Honesty

Now, get out there and "Make it Work!"

The chart below shows an example of the performance distribution curve for a successful sales organization, where about 70% of the sales team is making or exceeding quota. Attainment levels are distributed evenly along a bell curve, with just a few underperformers and overperformers.

 

 

 

 

 

 

 

 

 

In our most recent web seminar we asked our attendees if their reps were making quota. Most had a majority of reps below quota. Compared to the evenly distributed bell curve above, their performance distribution curves may look more like the one below, with just a few sales "superstars", and everyone else underperforming.

 

 

 

 

 

 

 

Sales reps want to win and judge themselves on achieving specific goals. So when they don't make quota, they become highly discouraged and unmotivated. So if your organization's attainment curve is similar to the one above, how do you turn a team of stragglers into a team of winners?

1. Evaluate the sales team skills. Do the reps have the proper skills and training to do the job? You may need to provide sales or product training for the reps.

2. Make sure the quota is realistic. Can most of the reps make it? Is the growth rate or recover rate realistic? Don't be optimistic when setting sales quotas. To keep your sales reps highly motivated, design a sales compensation plan so that at least 50% of your reps reach or exceed quota.

3. Review quota allocation. Did the company give the managers' one number and the reps a higher number? You should strive to fully allocate your quota. That means if the company has a $10m goal and 10 reps, the reps quota should be $1m each - not $1.3.

4. Evaluate your quotas and territories. The reps that are significantly over their quota may just be in a very rich territory and they may not be able to fully support the potential customer base - leaving sales on the table.

5. Look at your internal processes. Are they slowing down your reps? Are the reps spending valuable chasing paper within your organization when they should be making sales calls? Time to evaluate the process.

6. Analyze the lead generation engine. Determine if it's creating enough of the right types of leads. Is it matching the strategy that was used to create the quotas?

Whether your sales comp plan needs adjustment or other factors come into play, your efforts to create a team of winners, will (literally) pay off.

Haven't gotten around to designing your 2012 comp plans yet? You are not alone. Sales execs are telling us that they are busier than they expected. Demand is increasing, sales team resources are being stretched, and there isn't a minute to sit down and come up with new plans.

But if you don't carve out some time now, you'll be playing catch up the rest of the year, and you will leave money on the table.  Here's why:

This year promises to bring its own set of challenges and opportunities. Your revenue and profit goals reflect your expectations for 2012. But you won't achieve them if your sales comp plans are designed to meet 2011 goals and conditions.

A new year gives you the opportunity to improve on your sales plans - align them better with your goals, make them clearer for your sales reps to understand.  New and improved plans will help inspire trust in management and the organization. And by giving your team clear direction, you motivate your reps to greater achievement.

Great sales comp plans provide a great evaluation and management tool. If you don't spend some time now developing a good plan, you will spend much more time the rest of the year figuring out how to evaluate your reps' performance.

 

An effective sales compensation plan is critical in motivating the sales team. It provides focus and rewards for the right results.  To make sure that your plans help speed your team towards success, avoid these typical sales compensation plan roadblocks:

Plans that are too complicated: These plans cause reps to either waste valuable time trying to figure them out or, even worse, to ignore the plan altogether and do whatever they think is right.

Too many measures: A measure includes quotas, goals and any other expectation of attainment for the sales rep. If you have more than five measures, the plan loses critical focus. In my experience, you should have 3 or fewer measures to avoid distraction, frustration and confusion.

Unrealistic quotas: You want to have at least half of the reps making quota. Otherwise, the reps won't be able to see themselves as achievers and will quickly become unmotivated.

Financial rewards delivered too late to be associated with the event: It's human nature - when we are rewarded right away for a behavior, the motivation to repeat the behavior is strong. The more you wait to pay incentives to your sales rep, the more the reward loses its power to motivate.

We are counting down the days - the hours, actually - until the end of the year, and I'm sure you are doing the same.  So naturally, I'm thinking about end of period closing issues.

Some administrators will leave a period open until they need to start calculations for the next period. This can be a dangerous practice. You could possibly change the data, and the amount you sent to payroll may not agree with what your system is showing.

I am a firm believer that you must lock down your system when you send the feed to payroll. That is the only way you can guarantee that the numbers you sent to payroll and all the details that support that earnings calculations will be the same.  If you ever have to discuss in a court of law how you calculated someone's commission, you need to be able to provide undisputable proof as to how the commission was calculated. This can only be done if you have closed the period before sending it to payroll and  archived your supporting data and reports.

The Motivator Team wishes you a wonderful holiday season and all the best in the New Year!

 When it comes time to design your sales compensation plans, don't go it alone.

Comp plans created solely by sales executives will emphasize incentives and motivation.  Plans designed by finance will be skewed toward ensuring affordability.

The best  sales compensation plans balance these and other corporate requirements. So when you are developing your comp plans, get input from multiple constituents to help you achieve the right balance.

One person needs to lead the sales compensation planning process.  The leader gathers information, opinions, and advice from other team members, and keeps the project on track and on schedule.  The team leader must also determine the approval process and make sure that "sign off" occurs at the appropriate stages of the project.

The sales compensation team should involve the following:

• The CEO: provides key guidance on the company's strategy
  
• Finance : delivers plan affordability guidelines and sales goals.
  
• HR : contributes job descriptions, base salary, TTC (total target compensation) and organizational structure.
  
• IT: delivers transactional data used by the compensation plan and information about the ability to implement the proposed changes to the plan.
  
• Marketing: presents upcoming campaign strategies that will influence quotas.
  
• Participants: advise on what worked and what didn't work in the current plans and, towards the end of the process, how they perceive the proposed changes to the plan working.
  
• Product Management: informs on road map for new releases and new products which can also influence quota.
  
• Sales Management: analyzes the attainment distribution of the current plans and explains why they may have fallen short or exceeded the goals.
  
• Sales Operations: provides their analysis of the current plans, as well as territory alignment.
  
• Legal: reviews plan to ensure that they are in compliance with current laws, regulations and internal policies.

Small companies will find one person on the team may fill multiple roles.

With your team in place, you'll ensure your sales compensation plan is within budget, is primed to motivate your sales team, aligns to strategic goals, and is well communicated across the organization.

It is critical that you align sales plans with corporate strategy.  That's easier said than done, but following these four steps will get you thinking in the right direction.

First, the organization needs to agree on the corporate strategy that will be delivered though sales.  Is the goal to increase revenue, further penetrate the market, increase profitability, improve retention, sell long term contracts?

Some of these goals are mutually exclusive and, unfortunately, you can't have it all.  You need to ensure that the strategy doesn't compete with itself. Also, look at the number of goals.  If you try to focus on too many of them, they get diluted and the company will not achieve any of its objectives.

Next, see if the corporate strategy differs from last year's.  If the strategy will remain unchanged, did the sales plan deliver the desired results in the previous year?  If it didn't, search for the disconnect and adjust your sales plan.  Analyzing your team's performance distribution may point to the source of your problem.  ( See our post on "Building A Performance Distribution Curve On Your Sales Team". )

Once the corporate and sales strategies are defined, determine how the various job roles support the strategy.  Defining job roles goes beyond a focus on revenue numbers.  A change in strategy may lead to adding job roles to focus on developing channel partner relationships or separating new sales from renewal sales.

Lastly, look at measures within the roles. Measures are things a rep carries a quota or goal for. It is imperative that these measures align to the sales strategy.  With its visual approach, Makana's alignment view helps the plan designer ensure that the measurements support the corporate strategy and that the plans are aligned along job roles.

I am a big fan of quarterly bonus payouts.  When they are targeted to the right behavior, everyone wins. The company reaches the revenue they need and the reps get paid for delivering.

There are two ways to structure quarterly bonuses.  Goals can be cumulative for the entire year or divided into quarters.  

Let's review each option with a simple example:  The quota for the year is $1,000,000. Each quarter is 25% of the annual goal.  There is a $5,000 bonus payable each quarter for achieving the goal.

	Q1	Q2	Q3	Q4
Option 1: Quarterly	$250,000	$250,000	$250,000	$250,000
Option 2: Year to Date	$250,000	$500,000	$750,000	$1,000,000

Let's compare them and discuss implications:

Quarterly - The goal is the same for each quarter - in this case $250k. What's the typical sales behavior with this option? Based on my experience consulting with many companies over a range of industries, the sales rep will attempt to hold orders until the next quarter if they are below the quarterly quota and have no hope in achieving it - putting the order in the bank for the next quarter. I have also seen that the rep will hold an order once the quota for the quarter is achieved - again putting it in the bank for the next quarter. The rep's goal is to do enough to get the quarterly bonus and set themselves up for the next quarter.

Year to Date - The rep must be on target for each of the quarters and that target is the year to date quota. There is no benefit to the rep to hold the sale, no game the rep can play. The rep must be on target for each quarter based on the year to date goal in order to receive the $5,000 bonus for that quarter.

"But, Teanna," I hear, "the rep is so far behind on a year to date basis, he'll never get any of the bonus." My usual response:  why do you want to give him a bonus for underperforming?

I also often hear "what happens if in Q2, the rep has already attained $750,000, enough to earn the Q3 bonus without doing any more sales? Would you pay it out?" I respond, "Yes, absolutely. Show me a rep that is on target to exceed their annual quota and earn accelerated rates, and I'll show you a motivated rep."

Incentive  Comp is one of the greatest levers you have to drive strategy. Here are 10 steps that will help motivate your sales team to deliver the results you need. Download the the printable PDF "10 Steps to Great Incentive Compensation," here.

I am going to give you a sneak peak here:

1. Assemble the comp plan team.
   
2. Identify the job roles that support your go-to-market strategy.
   
3. Include all customer facing roles, not just sales people.
   
4. Define 2-3 tangible measures for each role.
   
5. Use a relevant mix and upside for each job role.
   
6. Model your incentive compensation cost exposure.
   
7. Set expectations with clear documentation.
   
8. Pay correctly and on-time.
   
9. Share performance stats with management and team members.
   
10. Evaluate and make changes when necessary.
    

To download the full PDF 10 Steps to Great Incentive Compensation here.