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Five Ways You Can Manage Risk in Your Compensation Plan

Cabrera_newToday's blog post is by Christopher Cabrera, CEO of Xactly Corporation, the industry leader in sales compensation automation.

 

In the past, managing risk was a topic that flew under the radar in the sales-compensation world. Today, experts in the field are bringing the topic to light. Managing risk is no longer just an abstract idea; it’s a mind-set that must be applied to the entire sales-compensation system. So how can you avoid leaving your company vulnerable to unforeseen costs, turnover, and uncertainty?

1. Analyze sales crediting.

In order to manage risk in your compensation plan, sales-credit rules must be examined carefully. When Xactly analyzed existing sales-comp data, we found as many as 160 commissions being paid out on one deal! This is a big problem. The cost is excessive, and if the company is still calculating compensation on spreadsheets, the true, comprehensive cost of the deal is likely not understood.

Get a read on your current crediting status by asking these questions:

  • Does the type of product sold change the amount of credit that’s given?
  • Does the type of customer alter the amount of credit given?
  • How much credit does each role receive?

2. Ensure that governance is in place.

Governance gets a bad rap in the field, but if you’re tightening your operation, governance has to have a part. To implement it properly, departments need to come together and communicate with one another. Human resources, sales, finance, and legal all need to be invited to the party – and they need to mingle.

Finance leaders claim they’re paying too much; sales reps say they’re not getting paid enough. With governance and an on-demand compensation solution, these communication issues are eliminated, and all departments can learn to play nice.

3. Use a plan-effectiveness metrics tool.

A tool to look at the analytics of geography, position, business unit, performance distribution, and pay differentiation is imperative. This will give you rich information so you can discern what’s working and what’s not in your incentive-compensation plan. It also provides insight into the financial and behavior risks your company could be facing.

4. Use an incentive system instead of a reward system.

How can you tell the difference? In a reward system, you hand a rep money and say, “Thank you for working hard.” The end.

In an incentive system, compensation drives behavior. Sales reps will look at the plan and modify how they sell, where they sell, and to whom they sell in order to be compensated accordingly.

5. Spot red flags.

Do any of these scenarios sound familiar? Your company is making money, but your reps are coming up short. Quota attainment is lagging. There’s an elevated rate of turnover.

These low-level problems are indicators of stormy weather ahead. Signs like these indicate issues that need to be remedied and the need to adjust your sales-compensation plan. Higher-level problems would include unhealthy levels of channel conflict, rising cost of sales, and poor turnover management.

Remember that managing risk is a team effort. It takes communication, teamwork, and the engagement of human resources, finance, and sales to do it effectively.

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I rarely comment, but I browsed a bunch of responses on Five Ways You Can Manage Risk in Your Compensation Plan - Selling Power Blog. I do have 2 questions for you if it's allright. Could it be only me or does it look like like a few of the responses come across as if they are left by brain dead folks? :-P And, if you are posting on additional online social sites, I'd like to keep up with anything new you have to post. Could you make a list of all of all your social community sites like your Facebook page, twitter feed, or linkedin profile?

Linda

This was a great article on risk management Christopher. I agree, it is important to apply risk factors. When you're prepared and knowing of risk, you have a far better idea of what to do. Proper risk planning is always vital.

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