Incentive compensation planning: When you’re looking to start a career in sales or want to progress to your next role, a key influence will be what compensation package is on offer. And the job description and recruitment process will be a major factor in whether you join the company or not. Whether your job title is sales manager, sales executive, or compensation administrator; if it involves or touches upon compensation, you’ll care that the plan or scheme put in place is not just robust but achievable and motivating. While there are various names for it - commission, incentive compensation management, bonus schemes – there are some key elements that must be included for it to work.
What is Compensation Planning?
A simple definition for a traditional compensation planning model is this:
“A compensation program constitutes a company's total method of remuneration, including payment, benefits and any other form of compensation for services rendered.” ¹
There is of course more to it than that. A comprehensive compensation plan will describe how any scheme dovetails with the business’ strategy, when a pay rise is scheduled to be discussed and what other perks are available, such as partnerships with health providers, childcare facilities, gyms, and retail outlets. All of this, on top of knowing what the commission rates are, can be very enticing. This is especially relevant for those that work in sales as a basic salary can be quite low, so the lure of golden targets and rewards must be enticing enough to attract the best talent.
With that in mind, it’s not enough to say “This is what you could have won” when a deal falls apart or a hot lead goes cold. From the hiring process to the end of probation, both the recruiter and potential employee need the full picture of the current compensation scheme.
And of course, when you’re updating or rolling out a compensation scheme, it’s a given that a budget and compliance rules are in place to support it at every stage.
Why Compensation Planning Matters
We’ve talked about how a discussion around compensation schemes is bound to play its part in the recruitment process. But it’s not just about impressing the candidate; it’s how this incentive is framed to attract the best candidates, and then retain them. If those incentives and rewards remain just out of reach; if the terms and targets change too regularly and if there is a record of inaccuracy in pay-outs, your business’ compensation plan isn’t working. And when there’s a failure to operate, it won’t be long before that talent you spent time and money onboarding abandons the company ship. One more thing, if you don’t put out an attractive compensation package, that talent won’t even want to come and talk to you, let alone work for you.
Discover why a compensation scheme should be important to you and your team in this recent article from Varicent.
When your compensation scheme isn’t firing on all engines
1. Shadow accounting is the shadow of a doubt: You’ve got a strong sales team, but it’s become clear that many of those high performers are indulging in some dark activities. No, they aren’t trying to defraud the company, far from it. In fact, what is happening is that they perceive that their payment and commission statements don’t seem to be matching up with their own figures, so their new hobby is shadow accounting. Inaccuracies within a compensation plan happen for many reasons, but mostly it’s down to manual errors on old legacy systems. Once this occurs, your compensation administrators can expect an almost permanent flood of payment queries, which soon makes a dent in efficiency levels for all those involved. Read more about the perils of shadow accounting and how to put an end to it here.
2. Failure to budget is a failure to succeed: Underpinning any compensation planning scheme are the parameters of a pre-determined budget. Making extravagant and unquantifiable promises to get someone to sign their employment contract is not only a last resort but a fast route to financial loss. We’ll discuss how a more holistic approach that prioritizes career development and training over financial reward in our solutions section.
3. Inequality in incentives is inequity in treatment: This point is really the sad and unwanted outcome of the first two. A common reason for compensation planning breakdown is that the incentives are different for various teams and individuals. You can apply the rationale that the level of experience and contribution should result in the opportunity for a higher bonus. But a lack of consistent planning coupled with working on incompatible platforms means that two people hitting the same target may be rewarded in completely different ways.
4. The path to compensation scheme breakdown is paved with angry auditors: Shadow accounting, inaccurate spreadsheets, budgets out of control: In the gladiatorial arena of compensation planning, that can only ever lead to one thing – a tough audit process. Of course, auditors don’t do “angry”; what they do is forensically uncover the fiscal outcome of a poorly managed plan, leaving your directors to go wild with the “angry” side of things.
The Changing Face of Compensation Planning
Having covered that multitude of mistakes, what’s being done to make compensation planning more watertight and realistic while still containing enough perceived “thrills” to attract and motivate, the cream of the sales world? To make sure that a “bigger picture” requirement is being met, many companies are now taking a more holistic and philosophic approach to compensation planning. Rather than framing it as an add-on and purely for the monetary benefit of those who qualify for it, the trend is to make it a permanent pillar that supports and sustains the business.
While keeping to this ideal, once completed and signed off, a compensation plan should tick off the following:
- Align with strategy and objectives
- Fit into the budget and business goals
- Be able to meet challenges presented by the industry and competitors
- Dovetail with operating needs
- Improve efficiency
- Include a robust package of total rewards and supports talent retention.
And in addition to all of these “big-sky” objectives, there are of course the nitty-gritty essentials and outcomes of how and where this new compensation planning utopia will be executed, which include:
- Removal of time-consuming manual processes
- Banishment of multiple spreadsheets to the non-recyclable bin
- Full visibility and access to current and personalized compensation levels
- Ability to post queries from any territory, outpost, or home office
- Better modeling capabilities for analysts
- High-level automation of relevant data
- Intelligence and insight that can be used for more accurate forecasting
- A holistic view of individual, real-time compensation targets
- A reliable source for auditing and reporting.
All the above reads rather well, but how do you go about building such a thing? Rather than just talking about a plan or having a vague idea of what it should be and sound like, the answer is actually a tangible one – an Incentive Compensation Management (ICM) software platform.
A Compensation Plan to Suit Everyone
While the main purpose of introducing compensation planning software is to modernize your scheme and bring parity to the process, there are some fundamental elements for your shopping list. Varicent Incentive Compensation Management brings together all the elements needed to support and grow your business’ compensation/commission plan in a straightforward way that will make sense to all users. It offers the essential tools for managers to deliver easy-to-read, accurate, efficient, and current data, so that your sales force can be confident of how near or far they are from commission targets.
The dashboards you include with ICM software must be relevant and easy to interpret; whether that purpose is for analysis and objective-setting by a stakeholder or for the personal development of a newcomer to the sales team. It should also integrate with the other contributing factors that inform SPM, such as quota setting and territory management.
To examine this topic in more granular detail, read more about how a platform like this can smoothly transform your compensation scheme here.
While the implementation of a software tool to transform your processes and way of working is invaluable, we’ll finish on some tips and expectations for moving your new compensation planning model forward.
1. Look and Feel
Dispensing of spreadsheets and phoned-in results means replacing that with something that doesn’t just look better but delivers accurate results for both the sales force and the administrators. An easy-to-digest interface with first-class graphics and mapping should be part of your priority package. A sales manager wants to know immediately how close someone is to target if they’re under-performing or if there is perhaps a wider issue with promoting a particular product.
2, Aligns with Wider Objectives
A good compensation system package should have the capability to digitally dovetail with your business’ broader sales objectives and strategy which can then be applied at the individual and wider team level when agreeing on remuneration. Ideally, this should inform and integrate with quota and territory management software, so you’re able to work on a wider view of sales performance management.
3. Offer Realistic Incentives
Returning to something we briefly covered earlier, one of the main intentions of repurposing your compensation plan is to take a more pragmatic approach to incentives. In the current climate, the financial pyramid of potential earnings must be supported by other elements and benefits. These include training programs, employee support, employee discounts, long-term service awards, and an authentic sense of career opportunity; all of which are becoming popular parts of the compensation plan package.
A Compensation Plan for the Future
By delivering a compensation plan that genuinely offers something for everyone, and that continues to operate and be monitored on an automated and accurate software platform, you’re eliminating several bugbears:
- Inaccuracy in pay-outs, therefore reducing incidents of shadow accounting.
- Frustration among employees, so fewer people wanting to leave.
- Motivation in your team, which breeds better results, productivity, and loyalty.
Find out how you can offer a more enticing and achievable compensation plan by arranging a demo with Varicent here.