The Worst Managed Trillion Dollars in the World
It’s not what you think.
You won’t find the worst managed $1tn at a venture capital firm, PE firm, or mutual fund. It’s not even at a major international or central bank.
The “fund” I’m referring to is the combined capital businesses allocate to incentivize their employees — the $1tn paid in variable compensation to the 15 million sales reps across North America every year.
The Problem With Sales Compensation
Sales compensation is all the commissions and bonuses that motivate salespeople to sell more. And believe it or not, most businesses (even some of the largest in the world) are terrible at managing their sales compensation programs.
Investors poured $38 billion into North American start-ups through growth-stage deals in Q4 2020. But the American insurance industry alone spends $40 billion per year on compensation for sales agents.
Entire industries are spending a business quarter’s worth of venture capital every year on sales compensation, but with a fraction of the analysis and bureaucratic rigor it would be subject to if treated as an investment.
Venture capitalists and PE firms deploy complex data models and thousands of analysts to ensure every dollar is well spent. Most sales organizations manage millions of dollars in spreadsheets and design compensation plans based on “gut-feel.” That inefficacy results in huge losses for these businesses over time.
This problem hits all of us in the pocket. These inefficiencies and bad practices result in huge losses for sales organizations and negatively impact owners and employees.
Shareholders and investors pay for it directly, and employees across the company are paid less as a result. But the damage goes even further.
Sales Compensation Impacts Employee Behavior
Poor investment in sales compensation has a far-reaching impact on the organization because it directly influences how employees behave.
When sales compensation isn’t properly managed, it can cause the sales team to misalign with business objectives—which inevitably impacts your bottom line.
The wrong or sub-optimal behavior results in lost opportunities, missed targets, and lower customer and employee satisfaction. These are issues that, if left unaddressed, can compound over time and lead a business into dire circumstances.
In my past life as a consultant at ZS, I saw firsthand how improving the incentive compensation structure can boost revenue.
In the ZS Explorer Study into High-Impact Sales Effectiveness Investments, we found sales performance increased between 4-12% when incentive structures were improved. For a large enterprise, even a 4% increase in revenue would equate to considerable ROI.
Too Urgent to Fix
When we consider the numbers, it seems obvious that sales compensation is an area that businesses should be investing in. So, why hasn’t this problem been fixed yet?
The answer: human nature. We have a bias towards urgency. For sales compensation teams, the most urgent matter is making it to payroll on time every month.
We call it the payroll treadmill for a reason — the checklist of rote, repetitive tasks never ends. Once payroll is completed for one month, it’s straight on to preparing next month’s data.
When sales comp teams get stuck on the payroll treadmill, they end up investing all their time, resources, and money into it, rather than investing in functions that add value, such as improving compensation plan design or quota setting. They become a cost center.
On the other hand, plan mechanics, such as commission levels, quotas, and accelerator tranches, are rarely set based on deep research or data science. Instead, most managers are time-starved at this stage, so they rush through the design process, gut-check a handful of incentive structures with a financial analyst and choose the plan that “feels right.”
Sales comp teams don’t need a faster, better-looking payroll treadmill — they need to get off it completely.Nabeil Alazzam, Founder & CEO, Forma.ai
While it’s entirely possible for strong sales leaders to put together an effective plan in this manner, they’re still leaving money on the table without data to inform their decisions. By basing decisions on internal knowledge, past performance, and pure instinct, managers are limiting themselves to the biases of their individual experiences.
Think about it — organizations spend millions on maintaining the payroll treadmill while letting value-driving activities like optimizing compensation plan strategy fall to the wayside. Talk about a poor investment.
Sales comp teams don’t need a faster, better-looking payroll treadmill — they need to get off it completely. Only then can they move forward.
Total Automation is Tomorrow’s Table Stakes
Making payroll is table-stakes for sales compensation teams. They need to get it right, on time, every time.
Many sales compensation software companies have attempted to solve this, but their solutions only shifted the work from one tool into another. The same manual and error-prone process remained, just in contemporary-looking software.
To get off that treadmill, you need to automate the admin completely.
That’s where we start at Forma.ai: we manage the entire sales compensation process so that organizations can escape the payroll treadmill forever. Our customers love it. Some even refer to it as “magic.”
But the real magic happens after we’ve lifted the burden of the repetitive tasks.
Beyond automation, our focus turns to leveraging data science to help our customers make more informed decisions about sales compensation plan design.
Forma.ai derives insights from hundreds of instances and millions of transactions across multiple businesses and industries. The platform’s deep understanding of incentives and their relationship to human behavior allows our customers to design plans that motivate sales teams, increase profit-driving behaviors, and maximize the ROI on sales compensation.
Imagine knowing which compensation plan would drive which behaviors — or the perfect time to deploy your next SPIF. What if you could forecast your spend on sales compensation within a 2% margin of error every year?
With insights from data models that are evolving every day across all customers and a process that no longer buckles under the weight of manual tasks, we ensure every dollar in sales compensation is a dollar well spent.
Sales Compensation Must Evolve
Inefficiencies in sales compensation are a massive problem. Not just for salespeople who aren’t being fairly compensated or sales compensation teams stuck on the payroll treadmill, but for everyone.
It isn’t being managed with any thoughtful, analytical rigor for shareholders and investors, which also damages employees because they miss out on better compensation.
The way that we think about sales compensation hasn’t changed in 80 years, while other industries have made huge leaps forward in their use of data to drive business outcomes.
Sales incentives today are being managed in as sophisticated a way as punch-hole loyalty cards. They were groundbreaking in their day, but large organizations have moved on to bigger and better innovations; sales compensation has not.
It’s time to eliminate the burden of the payroll treadmill and embrace data-driven decision-making to maximize the ROI on sales comp.
It’s time to throw out the punch cards.
About the Author:
Nabeil Alazzam is the Founder & CEO of Forma.ai — the first sales compensation platform to leverage the science of human motivation to drive revenue. Prior to founding Forma.ai, Nabeil advised Fortune 100 companies on sales force effectiveness and saw first-hand how traditional approaches to sales compensation were holding organizations back. His experience inspired him to revolutionize the space by founding Forma.ai in 2016.