From Cost to Revenue: Turning Sales Comp into a Strategic Center

In a recent panel discussion with revenue leaders in the tech space, we asked, "Do you consider your sales compensation program a cost center or a revenue driver?"

The question evenly split the (Zoom) room.

In other words, half of the organizations surveyed were leaving revenue and opportunity on the table by treating sales comp as a cost center.

Why is Sales Comp Considered a Cost Center?

The amount of work involved in administering and maintaining enterprise-level sales compensation programs is largely to blame for this position. Sales compensation administration and strategy are considered separate disciplines at most mid-size organizations and many larger ones.

The plan's administration is usually owned by a dedicated sales compensation or operations team that sits under Finance or HR or by individuals within HR & Finance that manage variable compensation as part of their wider role. Sales compensation teams day involves managing the tools and processes that support accurate commission calculation and payout. They work heavily with IT, Sales Ops, and other departments to collect the data, manage automation tools and commission runs, and resolve any commission disputes or errors produced by those processes.

Sales compensation teams are structured to be operational — they execute a strategy another group has developed. In many organizations, compensation teams don't have much say in plan design or the decision-making that goes into creating the incentive program and strategy.

Despite being the function closest to the data and the work "on the ground," the sales comp team is viewed as a cost center with execution responsibility instead of a strategic partner for incentives comp design.

Part of the issue is inefficiencies and ineffective tools within the sales compensation function.

Most sales comp teams are stuck on the payroll treadmill, spending their days bogged down managing exceptions, performing repetitive manual tasks or data entry and validation, and dispute management. They don't have the time or resources to think strategically about the incentives they're administering.

They're stuck "in the weeds."

Top-Down Incentive Comp Strategy Creates Cost

The sales comp plan design is typically a cross-functional initiative involving the Exec Team, Sales Leadership, Revenue Ops, Finance, and HR. Once a year, this team will come together to develop the compensation plan strategy and design.

Many organizations will enlist a sales force effectiveness consultant (not to be confused with Salesforce) to help them understand the effectiveness of their comp plans through data analysis and ensure the program leverages the most up-to-date best practices.

This approach results in significant organizational resources and time (often several months) dedicated to designing the comp plan for the next fiscal year.

The strategy is then passed over to the sales compensation team to execute. With this approach, the strategic effort is front-loaded to a single quarter, often relying on incomplete data from the current year, historical data, and business objectives determined by overly simplistic formulae.

While sales compensation is planned in a rushed, once-a-year manner, functions like marketing are monitored and optimized on an ongoing basis. What's to say sales compensation can't be treated the same way?

The Benefits of a Strategic Sales Comp Function

Organizations that commit to continuous monitoring and optimization of sales compensation operate very differently. There are three key areas they excel over their peers that take a traditional approach.

Better Understanding of Incentive Plan Effectiveness

First, the sales compensation function becomes a strategic and analytical partner to the sales organization during design season and throughout the year.

They constantly monitor the effectiveness of the compensation plan and use that data to recommend changes and improvements proactively. That gives strategic stakeholders in other departments a better, more timely understanding of the effectiveness of the comp plan.

If a new plan fails to produce the desired results or has unintended outcomes, it can be adjusted much earlier, protecting the business and ensuring it stays on track to meet its objectives that year.

Sales compensation admins and analysts are intelligent, creative, expensive resources that could often be better utilized. Giving the sales comp team more ownership over design can improve employee retention and satisfaction and produce better business outcomes.

Faster Executional Speed

Once an organization switches to"an "always-on" approach to sales comp strategy, proactively seeking out areas of improvement throughout the year, they can mobilize resources to execute changes faster.

Sales comp teams stuck on the "payroll treadmill" are at 100% of capacity (and often over) managing the commission payroll process and firefighting. Before shifting some responsibility for plan strategy over to the sales comp function, businesses must invest in the right tools and resources to get the team off the "payroll treadmill."

Once you have enabled them with better data-management tools, the sales comp team can move much faster, avoid lengthy decision-making processes, and act on the insights derived from data analysis.

When managing sales compensation is no longer an administrative burden, incentives can be adapted quickly to changes in the marketplace or unexpected events. For example, the need for a SPIF can be identified earlier, designed using up-to-date data, and rolled out to reps faster because reliable data is easier to access and used to justify the business case for changes.

Better Decision-Making

Sales compensation is one of the few areas of contemporary business where "gut feel" is a sufficient basis for organizational change. While Marketing, Sales, and Engineering have developed their ability to use data to drive decision-making, sales compensation has barely evolved since the 80s.

Successfully shifting strategic responsibility to the sales comp function requires the right tech stack and operational support to manage and manipulate data from across the business. Those tools facilitate rapid plan iteration, analysis, and data visibility, enabling faster decision-making across the organization.

Realized Business Outcomes

All of those benefits amount to a significantly better return on sales comp — a return that is far easier to calculate. Real-time performance data improves visibility into the comp plan and its outcomes, which executives can use to enable better decision-making.

The compensation program becomes more dynamic, enabling a more structured approach to commissions, SPIFs, and other incentives throughout the year, generating improved revenue outcomes and a nuanced understanding of how incentives impact the business.

How to Develop Your Sales Comp Strategic Center

What can organizations do to begin treating sales comp as a revenue driver and reaping the benefits we've discussed?

The most significant change required is a shift in mentality on how the sales compensation function is staffed and enabled. That means transitioning from focusing on getting the calculation of current plans correct to being the front line in understanding if the current projects are driving the right behavior and making recommendations in partnership with stakeholders on an ongoing basis.

People

For the best results, businesses should seek talent that understands the business strategy, sales strategy, sales ops tactics, and how incentives align to further these objectives. Organizations should seek out people with more analytical sophistication who can assess the effectiveness of plans and communicate those findings at an executive level.

Another positive of elevating your sales comp team is it rarely requires hiring new people. Sales compensation analysts are more than just spreadsheet or ICM tool operators, even if that's the role they are currently playing.

Most sales comp operators are sophisticated resources with a good analytics foundation who need to be upskilled in certain areas to meet this need. In our experience, they are often keen to take on a more strategic role and prove their value to the business.

Processes

Setting up and automating the completion of sales comp effectiveness analysis is key to success.

1. Create a recurring cadence for sales comp effectiveness reviews and establish a sales comp committee if one is not already in place that meets regularly (monthly or quarterly) to review analyses.

2. Include the sales compensation team and compensation committee in strategic planning processes that will have downstream impacts on compensation — and incorporate their feedback.

3. Standardize the process for deploying new incentives and SPIFs throughout the year.

Technology

The major piece in enabling your sales compensation function to take a strategic role is removing the need to spend all their time managing disputes and adjusting the logic in your ICM solution.

Most contemporary ICM software is designed to keep your sales compensation team in an executional role that sees them becoming experts in implementing and administering a tool — rather than experts in sales compensation and what drives your business.

The more you automate basic tasks, the more time the team can perform the ongoing monitoring and analysis that drives better business outcomes. With most ICM tools, even simple tasks like pulling data to run a SPIF or simple analysis become drawn-out because data is not natively integrated and must be pulled in from a separate tool.

ICM software setups are often rigid, making reporting cumbersome and inflexible to the changing business needs. Any changes usually require the support of expensive external support and weeks of lead time to implement, limiting organizations' ability to react and adapt.

Science is the Key to Sales Comp Strategic Success

To enable your sales comp team to succeed in a strategic role, they need the tools to support the easy analysis of data and the quick implementation of any decisions. Most sales comp teams are bogged down in repetitive, low-value admin, which keeps them from using their proximity to the data and logic to add strategic value.

With the right sales compensation management software, you can alleviate the admin and elevate the sales compensation function to a position where they can create lasting value for the business.

For best results, your sales compensation team also needs the ability to scenario-model and test the impact of changes outside of the core plan. For sales comp teams to affect business performance, they need a data science mindset, taking historical data and statistical tools, like Monte-Carlo simulation, to forecast the business impact of incentives before they're integrated into the core plan.

Sales comp teams that use statistical analysis and scientific testing to optimize incentives will have the most strategic value to an organization in the long term.