Professional Documents
Culture Documents
Cybernetics Approach To Sales Incentive Compensation Management
Cybernetics Approach To Sales Incentive Compensation Management
to Sales Incentive
Compensation
Management
Sales Incentive Compensation Management
(ICM) is increasingly becoming the key decisive
and motivating factor in influencing sales force
execution to impact business performance.
5. Conclusion 12
6. Reference 12
As sales models are being re-engineered to incorporate more market dynamics and adversities, sales
compensation models are also becoming increasingly complex. In the global market where increasing
customer reach is a major challenge, it has become essential to include dealers, partners, distributors,
retailers, contractors, buying centers across various sales channels into the business’ Sales ICM model.
Accurately measuring and rewarding the performance of the sales force (both internal and external to the
business) has become the key to driving desired behavior in achieving the business objectives. Failure
to understand Sales ICM as a key influencer for the sales force results in mal-aligned, error prone, labor
intensive and time consuming compensation processes and a frustrated sales force.
It is important to visualize Sales ICM as a business system which evolves and adapts to changing business
conditions, making it imperative to understand, incorporate and control various entities (both external and
internal to the business) involved in influencing the Sales ICM.
This white paper describes the cybernetics approach to understand Sales ICM to provide a 360 degree
visualization of Sales ICM as a business system. It will provide important insights into various feedback
loops which are critical to the improvement and overall evolution of the Sales ICM system. It shall also
provide a systematic approach in understanding and analyzing these feedback loops.
Sales ICM provides guidelines, insights and versatility in designing compensation plans that effectively
motivate the sales force and drive greater productivity. Sales ICM also provides inputs for sales performance
that is specific to product lines and customer segments, customer purchasing patterns. These inputs are
then used to enhance customer relationships and optimize effort.
Sales ICM aligns the sales force execution to meet the business objectives. Sales ICM helps the sales
force to stay focused on key activities and delivering results that directly or indirectly impact the business. As
more and more focus is on managing business growth, strengthening customer relationships, and building
shareholder value, businesses are recognizing that Sales ICM is a strategic driver to success.
The term cybernetics stems from the Greek word ‘Κυβερνήτης’, which means (kybernetes, steersman,
governor, pilot, or rudder — the same root as government). (Source: Wikepdia.com)
For the purpose of applying cybernetics to the Sales ICM system, organizations can be defined as: “A
mission driven cybernetics system with a number of information and communication linkages.”
Considering this definition, information system will have sub systems that can be broadly classified into the
following:
1. Physiological Control Sub Systems:
These kinds of systems look after the basic functioning of the organization. The physiological control sub
system monitors effective and efficient running of the routine operations of the system. When the physiological
control sub system is not functioning as expected, the organizations performance is drastically affected.
In context with Sales ICM, the systems performing the functions of collating, calculating and distributing
commissions can be categorized as physiological control sub system
Information systems also consist of feedback loops. Feedback loops are mainly of two types:
1. Positive (Self Reinforcing) Feedback Loop:
The self reinforcing feedback loop enables the system to evolve towards new behaviour or a new structure
through amplification of influences.
In context of the Sales ICM, incentive calculations feedback loop is a self reinforcing feedback loop (more
the commissionable events, more the number of calculations and more the commissions)
The CID representation is a convenient way to outlay feedback loops and related relationships that are
relevant to a particular problem situation, without distinguishing the natures of variables
Corporate Sales
Business Target
Strategy
Drivers
Business
Performance
The Sales ICM CID represents various entities involved in the Sales ICM system. The following concepts
are used to construct the Sales ICM CID:
From Sales ICM CID, there are two sub systems, which are the Incentive Calculation sub system (Physiological
Control System) and the Incentive Planning sub system (Operational Control system).
Generating Commissioning
The events that take place are as follows:
The sales force sells products and services to customers.
The customer places orders.
These orders are entered into the Order to Remittance (OTR) system.
Also existing customers use these products and services and provide revenue in terms of billing and
maintenance.
If customers are satisfied by using these products and services there may be opportunities to cross
sell and up sell. These cross sell and up sell opportunities result in more orders.
Also, customers who are not satisfied with the products and services may opt to abandon the products
and services resulting in clawback (negative commissionable events) and loss of revenue.
Orders, clawback, billing and maintenance services together form the commissionable events.
Processing Commissions
Orders, clawbacks, billing and maintenance service entries may be generated in various business systems.
A suitable interface is required to collate data from various systems as commissionable events to process
commissions. The events that take place are as follows:
Commissionable events are reviewed by the sales ICM administrators before they are processed.
Commissionable events are then processed to calculate commissions. These calculations are
governed by compensation plans which are made up of rules and policies.
The calculated commissions are reviewed by the sales ICM administrators before they are finally
published to the accounting system.
The calculated commissions are then accounted for in the accounting systems.
The respective sales force receives the commission.
Compensation payouts result in an increase in cost of sales which in turn impacts the actual profitability
of the organization.
Sales force can be provided with commission statements once the commissions are processed.
Processed commissions, commission runs and payout details can be viewed through an end-to-end
reporting tool.
The Incentive Planning sub system (Operational Control) is responsible for maintaining the incentive
compensation operational sub system. The functions of the Incentive Planning sub system can be summarized
below:
Sales Customer
Selling Productivity
Opportunities Interactions
Motivation
Orders
The above figure illustrates the feedback loop from the Sales ICM CID for the standard operational
commissioning process. This is the physiological control incentive calculation sub system within the Sales
ICM system.
Commissions play a very important role in increasing motivation and driving productivity. This feedback loop
can be summarized as:
More commissions translate to increased motivation, which in turn results in more opportunities, increased
orders and higher commissions. This feedback loop demonstrates the characteristics of a Self Reinforcing
feedback loop. The influences of the concepts in this feedback loop are that of positive amplification. Hence
in such cases change in the behaviour of any of the concepts will result in the system producing an impact
that is proportional to the change.
Sales Customer
Selling Productivity
Opportunities Interactions
Motivation
Orders
Reports
Commission
Plans
Revenue Abandoned
Orders
The above feedback loop highlights the impact of clawbacks in the Sales ICM system. This feedback loop is
a part of the physiological control incentive calculation Sub system.
Analysis
Consider a scenario in which a customer has bought products and services from an organization.
1. The customer uses this product/ service but is not satisfied with the performance
2. This would result in a negative opinion about the product and eventually the customer may stop
using the product/service
3. This will result in deducting the commission that the sales force had claimed when the order was
booked. This is known as a clawback
4. Negative customer experience can have a severe cumulative effect on the business performance.
It affects future opportunities to cross sell and up sell and results in low rate of repeat orders with
the customer.
Cybernetics Approach to Sales Incentive Compensation Management 8 TATA CONSULTANCY SERVICES
Clawbacks decrease the motivation of the sales force. This may result in the sales force pursuing lesser
number of opportunities with the same or similar customers.
This feedback loop demonstrates the characteristics of a Self Reinforcing feedback loop made up of negative
influences. The business needs to maintain a high degree of control over the influences in such feedback
loops
Organizations need to take care that clawback policies are not very rigid but at the same time it should
also convey that customers are not satisfied with the product/service that has been sold to them. Clawback
policies can be based on parameters like minimum usage a within time period and supported by a reason
analysis.
Sales Customer
Selling Opportunities Interactions Productivity
FEEDBACK LOOP 1
Others Motivation
Incentive Customer
Calculations Payouts
Customer
Experience
Statements
Abandoned Commission
Orders Plans Reports
Business Corporate
Drivers Strategy
FEEDBACK LOOP 2
Business
Performance
The above feedback loop highlights the impact of various entities on revenue and business performance.
These feedback loops form a part of the operational control incentive planning sub system. There are two
feedback loops in this system, namely, the Revenue feedback loop (Self Reinforcing) and the Cost of Sales
feedback loop (Self Regulating).
Analysis
Consider a scenario in which the sales force identifies a new sales opportunity.
1. The sales force interacts with the customer and closes the opportunity.
2. The customer provides the order which results in a sale for the sales force.
3. The sales force books the order in the OTR system.
4. The booked orders results in revenue for the organization.
Business performance (past and current) and business drivers need to be considered while developing a
corporate strategy. Based on the corporate strategy the sales hierarchy, territories, rules and policies may
be restructured with the sole objective of driving business performance through motivation and increasing
productivity.
However, if we analyze the second feedback loop associated with revenue, we find that more revenue is
generated when there are more orders and when the sales force is motivated, it also results in increasing the
compensation payouts. As the number of compensation payouts increase the Cost of Sales also increases.
This results in lowering the overall profitability which impacts business performance.
This acts as a Self regulating feedback loop for profitability in the Sales ICM system.
It can be summarized as more commissions result in more compensation payouts, which increase the Cost
of Sales. Increase in Cost of Sale can decrease profitability and the business performance.
Business performance is directly dependant on revenue from orders, billing or maintenance services.
Hence, compensation plans should be built, taking into account the factors that will impact the business
performance. It is important to align the compensation plan and its elements with the corporate strategy.
Also, it is necessary to minimize the impact of compensation payouts on Cost of Sales so that profitability is
at par with increase in revenue. This can be done by simulating the compensation plans in various business
scenarios before deploying them in the Sales ICM process.
Motivation
Orders Corrections Disputes
Business Reports
Revenue
Performance
Audit &
Cost of Financial
Sales Compliance
The above feedback loop highlights the impact of dispute management in the Sales ICM system.
Analysis
Consider a scenario where the sales force has received their compensation payouts and there is some
discrepancy in the payouts that were handed out. This will result in the sales force complaining about
the discrepancy. There needs to be a dispute resolution process that looks into such complaints. These
complaints will be validated and then resolved. After resolving these complaints, commissions are re-
calculated. Corrections may be applied immediately or may be applied in the next scheduled compensation
calculation run. It is necessary to analyze and ensure that the dispute resolution process has provided the
sales force with a satisfactory solution. This is important to ensure positive feedback on the Sales ICM
process from the sales force. Based on the feedback of the sales force, commission, policies and rules may
be re-organized to meet operational needs. This would result in a sales force that is more satisfied with the
Sales ICM process.
This loop is a part of the operational incentive calculation sub system and is very significant in achieving the
objective of accurate and timely compensation payouts. It can be summarized as follows:
Fewer complaints result is fewer disputes and fewer corrections to the commission payout. Due to this, the
sales force gives a positive feedback and more constructive compensation plans can be drafted. The sales
force is more satisfied, due to which complaints and disputes are reduced. This feedback loop demonstrates
the characteristics of a Self Reinforcing feedback loop made up of negative influences.
If there are regular disputes with certain compensation policies and rules then based on the feedback the
management will re-construct the policies and rules. This feedback loop is a part of the managerial incentive
planning sub system which enables the management to restructure compensation plans so as to incorporate
business scenarios and generate compensation that satisfies the sales force.
Conclusion
The Sales ICM system is a complex business system driven by external and internal influences that are not
accurately quantifiable. While CID provides a means to represent and understand the Sales ICM system in
terms of internal and external influences and analyze them with the help of feedback loops, it is important to
consider the behavioural complexities existing in the Sales ICM system. It is necessary that Organizations
do a thorough analysis of its business objectives, needs and operational readiness (people, process and
technology) before deploying Sales ICM Systems.
Based on analysis presented in this whitepaper, following should be the desired characteristics of a Sales
ICM system:
Reference
“System Practice in Consulting“ by Prof. P.N. Murthy, Business Systems and Cybernetics Center(BSCC),
Tata Consultancy Services Ltd. , Hyderabad, India
Email: raj.agrawal@tcs.com
Website: www.tcs.com/crm
All content / information present here is the exclusive property of Tata Consultancy Services Limited
(TCS). The content / information contained here is correct at the time of publishing. No material
from here may be copied, modified, reproduced, republished, uploaded, transmitted, posted or
distributed in any form without prior written permission from TCS. Unauthorized use of the content
/ information appearing here may violate copyright, trademark and other applicable laws, and could
result in criminal or civil penalties.