Carol is an Account Executive at a SaaS company, and this is her story.
It may be the end of January but Carol is still in the holiday spirit. She nailed her sales quota last year and is waiting for a windfall commission! She’s already made plans about how she’s going to spend the money.
5:00 pm - The salary arrives, but she is surprised (unpleasantly). It’s $5,000 less than what she expected.
6:00 pm - She calls her finance team but they don’t answer as they are busy with month-end reporting and audits.
7:00 pm - She calls her manager but he doesn’t have a clue either, he promises to check and revert.
12:00 pm -
After multiple follow-ups and a seemingly endless wait, the email reply finally comes from the finance team but it does not explain much. Carol is not convinced and feels cheated.
1:00 pm - Carol vents her frustration with her manager and her peers and is low on morale for the next few days or even weeks.
Months later - Still unconvinced, Carol has vowed to keep parallel accounts of her commission from now on as she does not trust the calculations. This will take days of effort each quarter and will take her away from selling but she does not have a choice. After all, this is what she works for.
If this happens again, she might even look out for another job.
The story behind this story - The commission check that Carol got was in fact correct. The finance team’s calculation was spot on. However, in the absence of
1) clarity on the comp plan; and
2) transparency of the calculations, the company may now lose an A-player.
Salespeople are crucial to the success of any business, as the revenue they generate is what pays the bills and allows operations to run. They have an immediate impact on key financial metrics including the company’s bottom line and top line expansion. Salespeople are arguably, the company’s most costly and valuable resource.
With such a huge impact, the best-performing salespeople are also very valuable and hard to replace. They take ownership of a slice of the company goal (sales quota) and share in the revenue (sales commission).
Typically, half of a salesperson’s compensation is variable, dependent on their performance, and governed by the rules of their sales comp plan. With such a large part of their compensation riding on commissions, they are very sensitive to any errors or mismatches from their expectations.
Often the errors are perceived (not actual), stemming from the sales rep’s lack of clarity of how the comp plan works and cemented further by a lack of transparency into the payouts.
With revenue, sales rep attrition, culture, and customer experience at stake, a company can ill afford to have a sales compensation process that is full of friction.
Carol’s story highlights the 5 ways in which an
An inefficient Sales Compensation Process hurts companies.
1. Poor return on investment
Despite paying Carol correctly, the company has a demotivated sales rep at risk of leaving.
Carol’s Company spends up to 5-10% of its annual revenue in sales compensation i.e. a $ 10 Million company could be spending as much as $1 Million annually on Sales Commissions. Is that an expense or an investment? If it’s an expense, then Carol should be paid as a part of the fixed or base salary. However, if it’s an investment designed to drive optimum performance, then the return needs to be monitored closely which was clearly lacking in Carol's case.
According to Gartner, just 24% of sales representatives can quickly determine their overall variable compensation. If sellers do not understand their compensation rate and how they will be paid, it is extremely difficult to use compensation to motivate them to accomplish a specific goal.
Carol wonders if a sheet-based manual process workflow is right for managing an investment running into Millions?
Isn’t that investment significant enough to justify automation and real-time insights?
2. Loss of trust of salespeople
Carol has lost faith that her payout is accurate, and feels let down.
Carol kept getting the wrong commissions and the payouts did not match her expectations, she started to doubt herself and the given payouts. Also, when she talked to her finance department or her manager, they couldn't give her a good reason. Carol eventually lost faith in the sales compensation plan, even though she had tried everything. This was only a matter of time then she gave up on all the hard work that she was putting in to make the sale because she felt cheated.
Is the company ready to lose its A player over a calculation mistake?
The cost to replace a fully ramped salesperson is $115,000 (accounting cost to hire)
3. Finance has a thankless job
The finance team had spent days, if not weeks, downloading reports, massaging data, and copy-pasting formulae in their master spreadsheet. And yet, Carol feels they did not do their job well.
The finance team is often frustrated because commission calculations are manual, time-consuming, and cumbersome. This of course they do while also working on multiple projects such as month-end reports and audits. Even after toiling hard, they don’t get credit for getting the calculations right (because that’s what’s expected). But if they get it wrong, there are going to be brickbats for sure. They wish the company would automate this process so they could spend less time on Excel and more time on more productive work.
4. Huge opportunity cost missed
Had Carol’s expectations been set right, had the commission check calculations been transparent - Carol would have been super motivated to kill her quota this year too! And yet.
It's tough for Carol to be motivated when she doesn't feel that her efforts are being compensated accordingly. She wanted to know what type of compensation plan was in place and how she was getting paid, and also why her incentives were not up to her expectations. That's why a company needs to choose its sales compensation plan carefully. If the finance department cannot offer the right commission, a sales rep will not take the plan seriously.
5. Sales reps feel undervalued and waste precious selling time
Carol did not get a timely response from finance. Actually, how can Finance provide specific replies to the many queries of 50, sometimes 100s Sales reps? When the response came it was inadequate, and the result - Carol feels her effort and undervalued.
Carol was an excellent sales rep and finding her replacement can be a time taking expensive and challenging task. One way to retain her was by creating a competitive, effective commission plan. If Carol had been valued, she would be more likely to work hard and stay on for the long term, saving money in recruiting and training new hires. Sales commissions are an important way of recognizing the value and importance of your employee’s contribution to your company.
According to a survey, only one-third of the average salesperson's day is spent selling or making sales. This is primarily due to the fact that 50% of salespeople don't meet their quota every year.
You must be aware of what they do when they are not selling.
In an effort to quantify work happiness, Tinypulse embarked on a study and found that 43% of people would leave their company for just a 10% salary increase. Meanwhile, it was determined by the Boston Consulting Group that happy employees have one thing in common: they feel appreciated!
The Sales Commission means a lot to Sales People. A lack of timeliness, accuracy, or transparency can cause demotivation, loss of trust, and possibly attrition of performing Sales reps. At the same time, it's complex - doing it on excel sheets can be error-prone, time-consuming, and full of hassle.
Luckily, there is a sales commission software available that makes calculating sales commissions easier, more timely, accurate, and more transparent.