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Aligning finance + sales = more profits: effective sales compensation management drives both top- and bottom-line growth. Automation can help align sales behavior directly to corporate financial objectives for enhanced sales performance and increased profits.

It's a conundrum. Businesses today need every competitive advantage they can muster, including the ability to leverage compensation to drive profitable sales behaviors. But, as finance departments around the world can attest, even as sales compensation is becoming increasingly strategic, it is also becoming considerably more complex--and therefore increasingly difficult to leverage strategically.

Most finance organizations are challenged when it comes to effectively managing the sales compensation process. The specter of Sarbanes-Oxley non-compliance and insufficient internal controls looms large over the manual processes typically employed for the purpose, and there's an enormously high probability that money is being left on the table because sales representatives are not as strategically motivated as they could be.

But it doesn't have to be this way.

Time to Connect the Dots

For most companies, sales compensation management is fraught with disconnects. At the highest level, there's frequently a disconnect between finance and sales, and between their respective processes. These processes are often fragmented and "stove-piped," with each organization addressing its own tasks rather than aligning on a common goal and common set of performance indicators. Hence, it's difficult for finance to measure how well the sales team is marching towards corporate financial objectives, and it's equally difficult for sales to design plans that maximally support these objectives.

There is also often a disconnect between sales representatives and their compensation plans. Reps are frequently in the dark, as they typically lack real-time visibility into where they stand versus plan and where to most profitably put their efforts. This impacts their compensation, and the company's bottom line.

Finally, there is the fundamental disconnect resulting from the almost universal use of stand-alone spreadsheets to manually manage sales compensation. As a medium for administering compensation plans, spreadsheets are cumbersome, time-consuming, error-prone and difficult to integrate into planning, analysis and audit processes and workflows. The inaccuracies they breed result in finger-pointing between sales and finance, and productivity-draining, shadow accounting on the part of sales reps as confidence in the system erodes.

Reliance on spreadsheets also breeds inflexibility, as it is extremely onerous to change plans or introduce new elements in mid-stream. And it makes it almost impossible to perform meaningful "what-if" analyses and model new compensation plans and plan changes before they're deployed.

These are all longstanding problems, but it is possible to eliminate these disconnects and their effects by employing the following proven best practices for sales compensation management:

1. Use real-time visibility to align finance and sales. It's axiomatic that you can't manage what you can't measure, and you can't measure what you can't see. If you are going to successfully align sales behaviors to corporate financial objectives, everyone has to be on the same page, all of the time.

This requires ready access to accurate, real-time information on actuals, key performance indicators, compensation statements and other compensation data. You don't get this from spreadsheet-driven processes and from compensation plans filed in a binder on someone's shelf. But you can achieve it by harnessing Web-based technologies designed for enabling widespread, on-demand, real-time business visibility.

2. Automate the sales compensation process end to end. With so much to gain, it's ironic that sales compensation management is one of the last frontiers for Web-based reporting and business process automation. But, as more companies are learning, automation is the foundation for effective sales compensation management, helping enable on-demand visibility, collaboration and the implementation of more strategic compensation plans.

With automation comes consistency, predictability and compensation accuracy and timeliness. These, in turn, foster trust and more productive relationships between sales and finance. It empowers you to implement smart and complex plans, and modify them quickly to meet changing market and business conditions.

Moreover, it liberates finance and the sales staff from the paper chase, so they can focus on more strategic work. It helps enforce a company's policies and workflows. And it enables repeatable reporting, robust analysis and comprehensive audit tracking.

Automation lets you effortlessly pull together the accurate compensation data that informs reports and helps provide real-time visibility across finance and sales. And it enhances compliance efforts in a myriad of ways, including enabling auditable online routing of compensation plan documents and "side letter" agreements for review and digital sign-off by sales reps, as well as automatic documenting and record of compensation decisions regarding senior management.

3. Ensure internal process controls and ongoing Sarbanes-Oxley compliance. Stand-alone spreadsheets are not internal control--or compliance-friendly. Despite best intentions, errors proliferate in spreadsheet-driven environments. There's no comprehensive auditing facility to track changes. Nor does a spreadsheet-based system scale gracefully--in fact, the more spreadsheets, the more potential for error. There is also no automatic policy and workflow enforcement, opening the door to exceptions and fraud.

The answer is to take the sales compensation process off of spreadsheets and automate it. It's the best way to reduce your risk and start ensuring ongoing compliance through consistent, repeatable and auditable processes.

4. Align incentive payments to performance. Variable compensation has emerged as a game-changing tool, with the potential to increase profitability and shareholder value by aligning sales behavior to corporate objectives. Instead of merely motivating reps to sell, variable compensation rewards them for higher-margin sales, improved discounting practices, and other desirable actions.

Variable compensation plans can be very sophisticated and complex, which again argues for automation and visibility. To get the absolute most leverage of such a plan, you want to be able to adjust it dynamically to meet the needs of the moment, literally.

This means quickly creating and communicating new plan components as well as SPIFs (Special Performance Incentive Funds) to help meet sudden competitive challenges, sell aging inventory or build market traction for a new product or feature. You'll want to be able to use not just cash but also non-cash awards, such as gift points, dinners and trips.

Freed from the strictures of spreadsheet-bound processes, compensation plans can "breathe," be more flexible and dynamic and align continually with fast-changing corporate objectives and requirements.

5. Trial-run your changes and new plans. Sales veterans will almost always tell you, "Don't mess with the compensation plan." This is good advice if you're shooting in the dark. But if you have the capacity within an automated environment to model proposed changes, to calculate the risks and measure the upsides before you "go live" with modifications, then that's a different story.

Thus armed, you can analyze the impact of new sales roles, new head-counts, overlays and other changes on commissions, your bottom line and your cash requirements. You can use actual payees in your models, and test results against your existing organization as well as your proposed new organizations.

The use of modeling can also be extended to the creation of new annual plans to predict their effectiveness and to prepare for their financial impact, free from risk. And once finalized and approved, new plans and plan components can be rolled out seamlessly into your automated operating environment.

6. Complete the circle. There's a wealth of valuable data generated by the sales compensation management process, starting with which incentive programs work and which don't, and what they cost relative to results. This information needs to be captured, analyzed and used to increase the accuracy of forecasting and the effectiveness of future compensation plans in a cycle of continuous process improvement. Again, automation and visibility are key to enabling this capability.

Putting It into Practice

In applying these best practices, a company is able to improve both its sales and financial performance. Sales and finance alike benefit from broader visibility and deeper insights, increased accuracy, new agility and improved process quality. Internal controls are tightened and compliance efforts enhanced. And, sales compensation management becomes a strategic and powerful tool for driving top-and bottom-line growth.

Leveraging these practices does not take a huge capital investment anymore, thanks to the on-demand software delivery model, but not leveraging them can mean remaining mired in an increasingly costly and non-effective status quo.

CHRISTOPHER W. CABRERA is Founder, President and CEO of Xactly Corp. ( of San Jose, Calif., which provides software to help companies design, implement, manage, audit and communicate sales compensation programs.


* Most finance organizations are challenged when it comes to effectively managing the sales compensation process. Many are using spreadsheets to manage a dynamic process, and Sarbanes-Oxley non-compliance and insufficient internal controls also loom.

* There is frequently a disconnect between finance and sales, with their processes fragmented and "stove-piped." Each organization addresses its own tasks rather than aligning on common goals and performance indicators.

* Reliance on spreadsheets also breeds inflexibility, as it is extremely onerous to change plans or introduce new elements in mid-stream. And it makes it almost impossible to perform meaningful "what-if" analyses.

* Automation of compensation plans frees finance and sales from administrative drudgery and empowers companies to implement smart and complex plans and modify them quickly to meet changing market conditions.
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Article Details
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Title Annotation:STRATEGY
Author:Cabrera, Christopher W.
Publication:Financial Executive
Geographic Code:1USA
Date:Mar 1, 2008
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