Today’s guest post is by Steve Marley, a principal at ZS in Chicago and a leader in the firm’s sales compensation practice. He and ZS principal Chad Albrecht are the authors of The Future of Sales Compensation (ZS 2016).
The difference between trends and fads can often be difficult to determine. Perhaps a fad is simply a subset of a trend, a particular element that experiences an explosion of interest only to fade from prominence back to relative obscurity. Healthy eating? Trend. Kale? Fad.
The world of sales performance management is abuzz right now with people espousing “analytics.” But is analytics a fad or a trend? Like eating healthy, analytics is undoubtedly a trend. That being said, analytics will surely give rise to various “fads” as companies attempt to take advantage of the rising interest in this area and offer magic bullets to address analytical challenges (Big data platforms! Pre-packaged analytics sure to meet your needs! Machine learning!).
Regardless of the increase in analytical fads, the use of analytics, by whatever name, will be one of the biggest influencers – and rightly so – of compensation decision making in the future.
The use of analytics in sales compensation is not new to best-in-class companies. But, if this type of analysis is already being used by some, why isn’t it used by all? It is possible that companies are aware of the need for and understand the benefits of analytics but just haven’t put the necessary processes in place. (As an analogy, most people understand the difference between maintaining a healthy diet and eating unhealthy foods, but simply knowing this difference doesn’t mean people will substitute a salad for fries.)
Why is analytics so important to sales compensation? Consider its possible impact in three different areas: designing incentive plans for maximum impact, paying people in an accurate and timely manner, and attracting and retaining the best talent.
Area 1: Designing incentive plans for maximum impact
When it comes to developing effective compensation plans, one of the most common uses of analytics is to assess the fairness of the plans. Fairness checks are typically performed to uncover whether external factors are influencing payouts or performance. For example, an analysis that shows salespeople over-attain in territories with small quotas may lead you to change your quota setting methodology.
Area 2: Paying people in an accurate and timely manner
Analytics is often an underserved part of ongoing administration. Basic analytics can tell you how the sales force is performing or whether there are clusters of territories that are over- or underperforming. Additional analytics on operations can identify error rates and root causes in the administrative process – perhaps detecting recurring data issues that can be addressed before that data is sent for processing in your incentive compensation management (ICM) system. Advanced analytics can also help sales leaders identify proactively when a plan is not performing as desired, without having to wait until the end of the performance period to realize an issue exists.
Area 3: Attracting and retaining the best talent
The fear of many sales leaders is that disgruntled salespeople will leave the organization. It’s a common rationale when those leaders lobby for special payouts or exemptions to the comp plan. Their concern is understandable. Salespeople are the most valuable (and potentially expensive) resource in a company. When a salesperson leaves, the financial impact goes beyond the cost of rehiring and training. Accounting for lost sales in uncovered accounts, the impact of salesperson turnover is estimated to range from $50,000 to more than $1 million. Analytics are being employed to help companies predict salesperson turnover, which – if prevented – can save companies millions of dollars. An organization with 300 salespeople that reduces salesperson turnover from 10 percent per year to 5 percent could save $7.5 million in lost or delayed sales if the impact of each salesperson’s departure is $500,000.
Advanced analytics is relatively new to sales compensation, but, like any hot trend, many organizations are now jumping aboard this train. However, like other elements of compensation programs – good design, good operations – analytics will benefit from a steady, experienced hand. Many companies will be willing to try the equivalent of analytical fads, but the companies that experience the most benefit will likely be those that focus on implementing solid foundations.
While there is nothing wrong with the compensation equivalent of an acai blueberry smoothie, keep in mind that it’s more important to focus on eating healthy!