This story was originally posted on the Intangent blog as Three levels of maturity for sales compensation plan cost modeling.
Incentive compensation plan changes are a reality that organizations face every year. Sometimes plan changes are structurally significant and made in response to exciting new business initiatives. In other cases, these changes are mere tweaks to a model that is already operating well. In any case, change means entering into the unknown and one aspect of the unknown is the expected cost of the new incentive compensation program.
Organizations that have automated their incentive compensation management processes have an advantage in modeling the cost impact of new plan changes (click to tweet). These organizations can leverage their existing investment to accurately model the impact of future incentive compensation plan changes using tools and data that they are already familiar with.
Here, we will review three approaches to sales compensation plan cost modeling that can help your sales organization set expectations for next year’s incentive program.
Good: Basic incentive plan modeling
A common method for understanding the cost impact of new incentive compensation plan changes is to simply test the new changes against last year’s data. Depending on the tools used, this can be a very straightforward process, broken into five parts:
- Create a sandbox environment.
This is often a copy of your production environment that you can modify without any impact to actual production operation.
- Prepare the sandbox environment with the new plans.
For basic changes, this might be building out the new rate tables, territory assignments, and quotas. For more complex changes, the new plans may need complete configuration within the application. Either way, the quality of the output will depend on the quality of the input, so we recommend a clean and accurate implementation based on the information available.
- Prepare the forecast data.
In this basic approach, forecast data is comprised entirely of prior period data. For example, if we are performing this analysis in September of 2017 for the calendar year 2018 then we would copy January 2017 through August 2017 to January 2018 through August 2018. The remainder of the year would be a copy of September 2016 through December 2016. Most organizations will manipulate the inbound data at this stage to reflect a top-line increase in sales volume for the new year.
4. Analyze the results and make adjustments
Once your initial configuration is complete, you can begin your analysis of the results. Since we’re using a complete ICM model, all field rep, manager, and administrative reports should populate with representative data. Analysis using built-in data exploration tools or through existing reporting in the ICM solution can also be used to understand the forecasted impact of the plan changes. As the analysis is performed, adjustments to the plan can be made to refine the incentive program changes. This ensures best alignment between sales incentive programs and corporate strategy.
5. Promote your changes
Once approved, application administrators can quickly migrate the new incentive program configuration to the production environment in time for the new selling season.
The advantages of this basic approach are that it’s quick, it’s easy to control, and it’s reasonably accurate. The primary drawback to this approach is that sales plans are often modified to generate a business result, which is not considered in the forecast data as prepared above.
Better: Incentive plan modeling and forecasting
One way we can improve on the above is to model forecasted revenues along with plan changes.
Sophisticated organizations are able to connect the detailed sales forecast, often maintained by Finance, to the incentive compensation model. This allows the sales operations team to directly link the new incentive program to next year’s forecast sales results. Forecasts will not build out to the detailed transactional level, however planning and analysis tools make it easy to push down forecasts to the levels required to compute valid incentive results.
Another area of impact is rep-oriented activity. Turnover, open territories, and new headcount have a measurable impact on sales incentive costs and sales effectiveness. Detailed forecasts that relate to rep activity should also be built into next year’s plan to assemble a better overall cost picture.
Incentive compensation reports will now show results that use much more accurate forecast inputs, including the impact of rep-level changes. These additional steps will dramatically increase the accuracy of the cost model.
Best: incentive plan scenario modeling
Top tier organizations seeking the best answers on what the new sales programs may bring should extend their analysis by building multiple scenarios to understand the potential cost of their sales programs. With the right software package, scenario modeling is an inexpensive way to uncover undesirable results that stem from sales program changes.
Scenario modeling means modifying the forecast to reflect potential outcomes for the coming year. Commonly we see customers modeling “worst-case,” “likely case,” and “best-case” results for sales, which should result in “low,” “medium,” and “high” sales commission budgets. We also recommend that organizations analyze market data and CRM data to identify potential scenarios. For example, if a new product is being aggressively marketed and incentivized, what is the sales budget impact if many sales team members are deep into accelerators? Or what if our planned expansion into APAC is delayed by several months?
More than just good budget guidance
There is a lot of hidden value in compensation plan cost modeling when it’s incorporated into an incentive compensation management solution. By modeling upfront, sales operations can identify a flawed incentive plan before announcing it to the sales team. Also, because the plan is configured in advance, the plan configuration can be more thoroughly tested and rolled out sooner. Finally, with scenario modeling, sales operations will have the data and forecasted results needed to show the sales team that the new plan is profitable and attainable. This boosts team morale, increases trust in the new targets, and gets the team out selling faster.
Sales incentive budget setting can range from simple and insular to complex and highly visible. Sales operations and finance groups should consider using a cost modeling approach that matches the goals, impact, risk, and sensitivity of the planned incentive program changes.
While considering whether an sales commission structure is right for your organization, consider the interdependence between a sales plan mechanics and sales behavior. Download the research brief, “Using compensation mechanics to drive sales behavior.”