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SALES COMPENSATION

SOLUTION ACQUISITION

BEST PRACTICES GUIDE


SALES COMPENSATION Best Practices Guide
SOLUTION ACQUISITION

Table of Contents
Introduction 3

Motivation for Change 5

Solution Acquisition Process 7

Effective ICM Solution Acquisition 9

Recommended ICM Acquisition Process 13

Model ICM Acquistion Approach 18

Analyst Bottom Line 20

Action Plan 21

About Demand Metric 27


INTRODUCTION SALES COMPENSATION SOLUTION ACQUISITION BEST PRACTICES GUIDE 3

Introduction
Consider this tale of two companies. For the second company, the focus was on known performance, and the
success of the acquisition surprised no one because it had a benchmark.
One has a respected, 100-year-old brand that employs several hundred
sales people who are paid through a manual process for administering Figure 1 shows that less than 1% of questions in ICM RFPs analyzed while
commissions. While the need for relief from its manual process was researching this guide were related to benchmarks or best practices.
acute, there was anxiety about introducing change – even beneficial
change – to the sales compensation process. To acquire a solution, the
first company produced a traditional RFP because it was a familiar way
to acquire an unfamiliar solution.

The second company was newer with a sales force numbering between
400 and 500 representatives. It hired a new Vice President of Sales FIGURE 1: TRADITIONAL ICM RFP FOCUS: MISSED OPPORTUNITY
that came from an organization that used an Integrated Compensation
Management (ICM) solution. The new VP made acquiring this same ICM
solution a condition of employment with the new employer; no RFP was 1%
issued, just an order to the ICM vendor. 39%
Which company fared better in its acquisition?

Both acquired the same solution that capably addressed their needs. But
the focus of each acquisition was very different.
Features Benchmark data
For the first company, the emphasis was on the bells and whistles of the
& functions & Best Practices
solution. The fact that this acquisition process produced a good outcome
was almost accidental.
INTRODUCTION SALES COMPENSATION SOLUTION ACQUISITION BEST PRACTICES GUIDE 4

This guide suggests a better process for acquiring an ICM solution. If, on the other hand, ICM solutions are implemented merely to automate
For many companies, sales compensation is the largest component of what may be a bad process, at best some efficiency gains are realized,
Sales, General, and Administrative (SG&A) costs. but the greater benefits are left on the table. ICM solutions are often
acquired through an unwieldy Request For Proposal (RFP) process that
The monthly calculation and payment of variable sales compensation is
too often focuses on solution features, while ignoring sales compensa-
often an arduous, manual process that must accommodate a number of
tion best practices.
exceptions and changes: rarely does a sales compensation plan start
and end a fiscal year intact. The purpose of this guide is to help companies that seek to acquire
ICM solutions take an approach that doesn’t simply automate an
The plan must survive the attrition and addition of sales representatives.
existing process, but reengineers it by introducing best practices that
It must accurately calculate and pay commissions on time, as there are
deliver measureable ROI.
risks and trust issues involved when it doesn’t. While the sales compen-
sation plan is, theoretically, an enabler of revenue growth, these charac- This guide will examine the problems that motivate ICM solution acqui-
teristics prevent it from scaling as the business grows. sition, the limitations of acquiring one through a traditional RFP, a
recommended approach, an example project plan, and conclude with a
Given these challenges to managing and administering a sales
discussion of associated risks and rewards.
compensation process, the motivation to automate, streamline, and
even reengineer it are high. However, the perceived risks of introducing
change to this often fragile process are high as well.
If ICM solutions are implemented merely to automate what
A number of vendors offer ICM solutions that are enjoying increasing
may be a bad process, at best some efficiency gains are
acceptance and adoption. Their potential value is immense if they are
realized, but the greater benefits are left on the table.
implemented using a consultative approach where the vendor and
customer partner to integrate best practices.
MOTIVATION FOR CHANGE SALES COMPENSATION SOLUTION ACQUISITION BEST PRACTICES GUIDE 5

Motivation for Change


It’s important to create some context around the need for ICM solutions. Restating the numbers
The motivation for change comes from the inconsistent performance of
the manual sales compensation process. When public companies have to restate earnings, the
culprit is often the unexpected cost of sales.
The scope of issues goes beyond the glitches that are a nuisance to
the sales compensation plan administrators; they impact the compa- Regardless of whether the miss raises or lowers earnings,
ny’s finances, break the trust between management and the sales no CFO wants to restate earnings because it essentially
team, or both. says, “we didn’t get it right the first time,” inviting scrutiny
from regulators, shareholders, and the media about what
Addressing these issues may involve debugging Excel macros, and their else is incorrect.
resolution is more like a Band-Aid than a strategic fix, leaving all parties
uneasy for the future rather than relieved.

Some of the common problems that motivate companies to investi-


gate automating the sales compensation process include restating the
Incongruent goals
numbers, incongruent goals, scalability, inefficiency, complexity, audit find- The sales plan sometimes encourages, rarely intention-
ings, and “gut” feeling. ally, the pursuit of goals that are inconsistent with overall
Any of the reasons described here are alone sufficient to motivate a corporate goals. If, for example, the prime directive from
company to investigate getting relief through an ICM solution. The goal the executive suite is to maximize profitability, but the
is to fix a sub-optimal sales compensation process, but too often the sales compensation plan rewards only revenue genera-
solution acquisition process is flawed as well. tion, goal conflict can easily occur.

This motivator occurs more often in companies that suffer


from organizational silos, but any organization that isn’t vigi-
lant in monitoring alignment can experience this problem.
MOTIVATION FOR CHANGE SALES COMPENSATION SOLUTION ACQUISITION BEST PRACTICES GUIDE 6

Scalability Complexity
At some point, a manual sales compensation process fails For some organizations, the complexity of administering
to meet the needs of the organization. These failures can the sales compensation process is in the critical path to
result in delays paying incentive compensation or inaccu- closing the books each month.
rate commission checks.
This complexity introduces delays in key financial reporting
Regardless of the form the failures take, they produce and prevents company leaders from having timely infor-
concern in the sales force. Chronic failures create a crisis mation about profitability and margins.
of confidence that can lead to sales force attrition, and it is
rarely the low performers that decide to leave. Audit findings
Audits can reveal problems with the way sales compen-
Inefficiency sation is calculated and paid. What is troubling about this
type of problem is that an audit can uncover flaws that have
Very much related to scalability, but deserving its own
affected the process for quite some time.
discussion, is process inefficiency. A manual sales compen-
sation process may simply be too painful to sustain. When this occurs, it almost always results in expense and
legal liability for underpayment, or morale-damaging efforts
Assigning more human resources to it fails to tame it, and
to claw back overpayments.
worse, the resources it does consume are tied up admin-
istering the process, stealing time away from other stra-
“Gut” feeling
tegic activities.
Sometimes, management instincts lead to questioning how
well the sales compensation process is working. Are plan
earnings truly indicative of who is contributing the most? In
other words, are the top earners also the top performers?
When the answer is “no,” management should investigate
and understand why.
SOLUTION ACQUISITION PROCESS SALES COMPENSATION SOLUTION ACQUISITION BEST PRACTICES GUIDE 7

Solution Acquisition Process


For decades, companies have used an RFP to acquire systems and solu-
tions. RFPs are familiar mechanisms for acquiring accounting, CRM, and It is entirely possible for a “successful” RFP to result in
ERP solutions. ultimate failure because the solution it leads to acquiring
doesn’t fix the flaws of the sales compensation process;
Why not ICM solutions as well? The perception is that an RFP works
it merely automates them.
well for more complex solutions, particularly where there is some
degree of risk.

There is a certain comfort level in producing a lengthy RFP, one that has
been thoroughly vetted to include questions about every possible solu-
tion feature and capability.

The RFP approach may work well for acquiring many types of solutions,
but the “traditional” RFP falls short as a means for acquiring ICM solutions.

The reason is that such RFPs are typically built on a flawed premise: the
automation of an existing, sub-optimal sales compensation process.
It is entirely possible for a “successful” RFP to result in ultimate failure
because the solution it leads to acquiring doesn’t fix the flaws of the
sales compensation process; it merely automates them.

This realization comes slowly, as there are almost always efficiencies


gained through automating any process, but if the core, underlying
process is unsound, the benefits are short-lived.
SOLUTION ACQUISITION PROCESS SALES COMPENSATION SOLUTION ACQUISITION BEST PRACTICES GUIDE 8

There are two critical success factors for ICM solution acquisition that the
purchase process must account for: The Mathematical Model and The
Best Practices.

The ICM solution acquisition process must fully investigate both The Best Practices
the mathematical modeling and calculation capabilities of potential
vendors, and also the best practices and benchmark data associated As stated in the introduction, sales compensation is
with sales compensation plans. The traditional RFP approach works often the largest single component of SG&A expense
well for the former, but what about the latter? costs. Like any other expense, executives should expect
a reasonable return, and the way to maximize ROI is
through identification of best practices and the tools to
The Mathematical Model implement them.

Can an ICM solution accurately calculate commissions, ICM acquisitions that don’t also emphasize best prac-
bonuses, and incentive payments? While this success tices essentially results in the purchase of expen-
factor is no trivial matter, the reality is that today’s ICM sive compensation calculators that, while capable of
solutions are very capable of performing the arithmetic. creating some efficiency, only provide a backward
looking view of the compensation process.
By their own admission, they all are very good at calcu-
lating variable sales compensation, even when those Companies need to know with precision if their compen-
calculations are rather intricate. sation plan is producing the expected results, the impact
of changes to the plan, and how the plan is expected to
With the proper collaboration, all reputable vendors can
perform in future months and quarters.
automate a compensation model, account for exceptions,
produce reports, provide override or customization capa- Ideally, a prospect for ICM could describe the type of perfor-
bilities, and generate payments in a timely fashion. mance their compensation plan is intended to drive and get
vendors to share a wealth of best practices and benchmark
These capabilities are the focus of most ICM RFPs, yet if
data to produce the desired outcome. Yet, very little content
the scope does not go beyond these capabilities, the buyer
in a traditional RFP interrogates to discover if vendors can
is at risk of acquiring a solution with a short shelf life.
offer wisdom and experience in this area.
EFFECTIVE ICM SOLUTION ACQUISITION SALES COMPENSATION SOLUTION ACQUISITION BEST PRACTICES GUIDE 9

Effective ICM Solution Acquisition


In this guide’s introduction, a tale was shared of two companies that FIGURE 2: ICM RFP CONTENT CATEGORIES
acquired ICM solutions using different approaches.

That anecdote effectively frames the acquisition discussion for ICM solu-
Features/functions 39%
tions. The company that issued the RFP may have identified an effective
solution, but the use of an RFP did not guarantee that. Business intelligence/
14%
Analytics
The second company did experience success. There are obvious differ-
ences in the processes used by these companies to acquire a solution, Technical/architecture 12%
and understanding these differences is critical.
Security 12%
The second company had a completely different focus, which was not
simply the elimination of the arduous, monthly manual process of getting Data integration 7%
commission checks out the door. Instead, the focus was far more strategic:
access to benchmark data and best practices expertise to enable collabo- Training/Support 7%
ration with the CFO on increasing the return on sales compensation.
Company viability 3%
The bells and whistles of potential solutions were not the primary acqui-
sition consideration because the new VP understood from experience Implementation 2%
that the ROI of the chosen ICM solution did not come from its features.
Company culture 2%

Instead, the focus was far more strategic: access to Differentiators 1%


benchmark data and best practices expertise to enable
Benchmarking/ 1%
collaboration with the CFO on increasing the return on Best practices
sales compensation.
EFFECTIVE ICM SOLUTION ACQUISITION SALES COMPENSATION SOLUTION ACQUISITION BEST PRACTICES GUIDE 10

To better understand the content of traditional RFPS for ICM solutions, 15 Of the 2,961 RFP questions considered in the analysis presented in
actual RFPS used for this purpose were analyzed. Figure 2, a mere six inquired about best practices or benchmarking
data.
Companies in several different industries prepared these RFPs, which
were sent to a variety of ICM vendors, and on average, the RFPs contained In fact, only four of the 15 RFPs that were analyzed contained any ques-
197 distinct questions. The individual questions in these RFPs were cate- tions in this category, and none of the RFPs adequately plumbed the depth
gorized to understand what potential purchasers were looking for in the of the best practices information category.
vendor responses.
The text of the six best practices questions found in this RFP analysis are
The result of that analysis reveals the emphasis of the RFPs evaluated for presented here, as they are representative:
this study (Figure 2 on previous page).
“Provide examples of how you share best practice information with
Each of the RFP content categories has merit – there are none that don’t your clients.”
deserve some consideration in the acquisition process. Rather it is the
“What reports and reporting best practices would you recommend
concentration of questions in certain categories and the lack in others that
based on past experience?”
is startling.
“Do you have any best practices for hospitality implementations?”
This data supports a premise of this guide, that traditional ICM RFPs are
heavily focused on solution features and functions. “If you have multiple integration solutions, describe your best practice
recommendation.”
The position of this guide is that purchasers should place far more
emphasis on best practices and benchmarking data than is indicated “Describe and provide examples of any non-tool related training
in this analysis. that is available for managers and administrators (e.g. compensation
guidelines, compensation best practices, etc.).”

“What is the frequency of data file updates that are accepted/required


(weekly, biweekly, monthly, quarterly) following program implementa-
tion? What do you recommend as a best practice?”
EFFECTIVE ICM SOLUTION ACQUISITION SALES COMPENSATION SOLUTION ACQUISITION BEST PRACTICES GUIDE 11

When acquiring solutions that must conform to a set of industry standards If a traditional RFP is not the ideal way to acquire an ICM solution, then
or generally accepted principles, such as accounting software, RFPs can what is the recommended approach?
work well.
It requires an approach that goes beyond the scope of a traditional RFP,
For ICM solutions, however, feature and function-oriented RFPs are far and instead evaluates the technology, assesses a vendor’s ability to
less effective because they provide no real indicator of performance. execute, and its ability to help your sales compensation process deliver
more value.

Figure 3 on the next page contrasts the scope of the traditional RFP with
the recommended scope of a more effective ICM acquisition approach:
While an RFP might provide insights into the process There are various tools and resources that can support the broader
efficiency gains an ICM solution can deliver, what matters scope of the recommended acquisition process.
more is process effectiveness.
These tools generally include a streamlined, business case-oriented RFP
and an accelerated, agile Proof-of-Concept (POC) that aligns the POC
goals with ROI.
From one organization to another – even within the same industry – there
is a high degree of creativity and variability in structuring compensation
plans, with several influences on how to structure them, including:

Market share Average deal size


Brand awareness Industry
Degree of competition Product positioning & maturity
Average sales cycle length Economic conditions
EFFECTIVE ICM SOLUTION ACQUISITION SALES COMPENSATION SOLUTION ACQUISITION BEST PRACTICES GUIDE 12

FIGURE 3: TRADITIONAL RFP SCOPE VS. RECOMMENDED RFP SCOPE

Traditional RFP
Recommended Scope
Scope

Validate Validate Ability to Ability to


Technology Technology Execute Drive ROI

Does the solution do Does the solution do Can the vendor provide Will the vendor co-develop
what I need to do? what I need to do? professional services, im- the business case, prove
plementation support, and ROI, and share best
is it financially viable? practices to create a higher-
value process?
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