Should Human Resources Own Sales Compensation?

Who is the best person or function to own or lead a business process?

The classic consultant answer is: It depends.

Much depends on the corporate context and, ultimately, who can administer or execute those processes the best.

Generally, Human Resources (HR) owns pay, but sales compensation is treated differently. Can and should Human Resources lead sales compensation? What’s preventing them from owning it now — as they do all other areas of employee compensation and benefits?

We held a webinar recently with World at Work on this topic, and I’d like to distill some of the ideas we discussed here for you.

A Simple Framework for Sales Compensation Ownership

The advice I used to give is that sales compensation should fit within the department that best represents your company’s pay philosophy. By pay philosophy I mean, how does your company view sales compensation?

If your company views sales compensation as a necessary evil, something you just want to ensure you have an accurate answer for, with a good audit trail to meet regulations, it makes sense for sales comp to sit with Finance.

If your organization believes that you can motivate and drive sales rep behavior through incentives — maybe, you utilize a lot of sales contests or SPIFs over the year — then it would probably best suit your organization to have sales comp sit in Sales Operations. They are the closest to Sales and probably know what best motivates them, and they can be that quick feedback loop on what is working and what’s not.

If you’re in a highly regulatory environment where you must follow laws, faces governmental oversight, or cares about the idea of equity and fairness within the plan, and think about the sales conversation as a recruitment and retention tool, it would probably best fit within Human Resources.

From a best practice standpoint, whoever leads the sales compensation plan design process should also own the administration and execution of that plan.

The Growing Concerns of Sales Compensation Design

Sales compensation has evolved a lot over the last few decades. On the design side, we’ve moved from a view of variable compensation as a mere math problem focused on what was good for the company.

As our understanding of behavioral economics and decision-making improved, the human element became more important, and factors like equitability and motivation were integrated into comp plan designs. What was good for the sales representative became a consideration during planning.

Even more recently, due to some unfortunate outcomes of unintentionally perverse incentives, the prospect and customer experience became more important. Now, sales compensation plan designs must consider what is good for the company, what is good for the sales rep, and what is good for the customer, too.

Many of the classic business functions are anti-agile, a little slow to respond to change, and somewhat set in the way they operate. Human Resources are often a more forward-thinking function and probably the most progressive when it comes to culture, organizational design, and discrete business processes. They are also responsible for People and Quality. With the right data, they are best positioned to see the full picture and satisfy all three of those stakeholders.

Technological Improvements in Sales Comp Administration

When I first got into this industry, sales compensation was wholly managed in spreadsheets by a team of accountants. Ownership often lay with Finance, and the focus was definitely: Let’s get the right answer and get payroll out the door.

That changed with the advent of Incentive Compensation Management software. Those tools — what I call process enablers — allowed us to automate some processes but left a large burden on the executional teams. A great deal of manual work is still done outside those automation systems. They didn’t solve 100% of the problem.

Contemporary Challenges in Sales Compensation

There are numerous challenges facing sales compensation teams today, even in high-performance enterprises. In my experience, they can broadly be distilled into two problem areas.

Decentralized Design

Most enterprise sales compensation design processes are owned by disparate groups. We bring together a committee of stakeholders, typically annually, with different objectives based on how they see sales compensation.

Sales will mostly be concerned with paying people more so they can recruit the best people and retain their top performers.

Finance is more likely to be concerned with avoiding overpaying and aims to reduce the compensation cost of sales.

Then we have Human Resources, who come to the table with benchmarking data and with concerns such as how to create fair and equitable plans and regulatory compliance.

These stakeholders often lack the concrete data to drive decision-making, so the negotiating process takes significant time and resources, typically beginning in Q3.

If Sales Ops are involved in the planning (and they should be), their function is to ensure the plan components can be executed within their Incentive Compensation Management (ICM) software.

The issue isn’t the design-by-committee process. In most cases, sales compensation plan design should involve all those stakeholders. The problem is the absence of a defined leader to guide the process and the lack of data driving the decision-making. That lack of data is mostly due to a disconnected executional function.

Disparate Execution

Sales compensation takes a huge amount of resources compared to other business needs.

The executional team — wherever they sit — are the folks doing the daily work associated with managing the incentive program: fielding calls from reps, adjusting calculations, checking the data aligns and producing reports. They are the frontline of comp plan knowledge, fielding and resolving commission disputes and communicating performance to leadership. They are also responsible for programming the new comp plans into whatever ICM solution is used.

Contemporary compensation management tools have helped us codify some elements of compensation administration, but we are still heavily dependent on people — and their understanding of the tools — to execute.

The logic governing most ICM software is as complicated as you imagine. Understanding how the plan components and calculations interact is critical to implementing any new plan or plan changes — even minor exceptions. That knowledge sits exclusively with the executional team.

There is a risk attached to having that knowledge of the plan mechanics and the operation of the software to manage it siloed within the comp team.

One question we like to ask customers is: “If your comp team were to win the lottery and quit, could you keep the comp program running?”

The workload required to reach payroll also prevents most compensation teams from making significant changes or producing meaningful reports regularly, so there is limited insight into plan performance until several months after the plan is rolled out. The complexity on the executional side effectively locks organizations into their comp plan for the year.

It’s important to note that despite their intimate knowledge of the mechanics driving plan execution, the team administering the comp plan often has very little say in the program design.

Friction Creates Diminishing Returns

The result of these two problem areas is significant friction and an inability to react to changes in the marketplace, leading to diminishing returns from the incentive program.

Software limitations and complexity lock organizations into their plan for at least several months. The huge manual workload involved means that compensation plan analysis and redesign are typically only performed annually, even if significant changes occur over the year.

Considering the rapid macroeconomic shifts over the last few months, it’s not surprising that most compensation plans produce suboptimal results. Even if they manage to be suitable on launch, they rapidly lose impact as the year progresses.

Remove Data Wrangling from the Equation

We need to make data-driven decisions when it comes to sales compensation. But most organizations still require a lot of manual massaging of the data to get insights in time to make use of them.

The traditional arguments against HR owning sales compensation are around the executional side and issues finding HR resources with the technical expertise to do that effectively. But we can see that comp plan administration is already an area of friction and inefficiency in most organizations.

To make the ownership conversation easier, we must take that data wrangling element out of the discussion by automating it as completely as possible.

Continuously Monitor Sales Comp Performance

People should be involved as little as possible in the processing and uploading of data so they can focus on quality assurance, analysis, and ensuring alignment with business objectives. Full automation of the executional side would allow any business function — in theory — to own the process.

Automating data management also solves the lag issue. Compensation program outcomes can be fed back to the planning and organizational leadership continuously.

Questions like, “Where are we heading?” and “Is the plan working or not?” can be answered on demand instead of as part of the annual planning process. That allows leadership to react to external market changes when they want to, and ideally, proactively.

HR Could Lead a Unified Sales Compensation Function

Contemporary sales compensation programs are concerned with a great deal more than just calculating commissions accurately. With their responsibility for People, Pay and Quality, Human Resources are likely best positioned to ensure that sales compensation plans meet the needs of all internal and external stakeholders.

Traditionally, Human Resources were limited in their ability to lead sales compensation design and administration because of the high workload and complexity on the executional side. That also limited the feedback of data, further limiting plan effectiveness.

If organizations can get to a state where the administrative burden of executing and analyzing the compensation program is fully automated, then Human Resources teams would be much better positioned to own sales compensation.

Even if you don’t see HR ownership aligning with your organization’s pay philosophy, you’re bound to get better results by removing data wrangling from the equation and approaching sales comp as a continuous process.

If they can make a business case for it, some enterprises will want to build that automation and expertise internally. Others should look to solutions like Forma.ai, which enables a unified, continuous sales compensation process through full automation.