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Incentive compensation can be a compelling way to improve a company's bottom line. After all, what could be more motivating for sales representatives than tying sales wins directly to individual pay? But while reps enjoy the upside of such initiatives, they're often thornier for the finance and HR leaders who manage them.
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Draeger, a medical and safety technology company headquartered in Germany, adopted dedicated compensation management software several years ago, and financial analyst Amanda Bokan does not look back fondly on the days of using Microsoft Excel to manage the process. "It was very tedious," she said.
Draeger moved from Excel to compensation management software from Centive in 2007. When the vendor was acquired by Software as a Service (SaaS) vendor Xactly Corp. in 2009, Bokan said Draeger evaluated a migration to Xactly's Incent product alongside Callidus, a competing provider. The company ultimately chose Incent due in part to better end user visibility into the process and ease of use, she said.
The main advantages that Draeger has reaped from using Xactly Incent to manage incentive compensation for more than 200 sales reps are administrative, according to Bokan, and she said the system and its mobile application has been well-received by end users.
But while incentive compensation seems like a natural fit for sales reps, Xactly is now seeking to extend pay-for-performance to an organization's entire employee base with its recently announced Objectives product. Denis Pombriant, founder and managing principal of Beagle Research, said this approach might be a smart one for companies.
"A trend we're seeing increasingly [is] organizations trying to tie compensation to performance, which is something we've been doing in sales since the earth cooled. But it's a business school generalization that you should have objectives for everybody, and comp should be tied to objectives," he said. "It makes a fair amount of sense to do that."
Mobile app provides visibility and accessibility
Draeger's CFO, its financial analyst and Bokan, who at the time was the accountant responsible for processing commissions, made up the team that decided to migrate to Xactly in late 2009. After the contract was signed, the company was faced with an implementation timeline of mere months, as the system had to be operational by February to coordinate with the first payroll. Despite the fact that the company self-implemented, with Bokan, a Draeger colleague and an Xactly professional services representative setting up and testing the system's business rules, Bokan said the process was relatively smooth and finished on time.
Bokan said the initial move from Excel to compensation management software helped reduce her administrative burden. "We were trying to eliminate the errors and process inconsistencies that you have with any manual tabulations and free up my time as the administrator to do other things with the organization," she said. She added that the move also cut back on the "shadow accounting" by reps that served to double-check her calculations.
Xactly has furthered these advantages by providing greater visibility and access to Draeger's reps. "It's great to have an automated online tool that's available 24/7, 365 days a year," she said. "Nobody has to email statements out every month -- the reps can go on and pull their own data." Bokan said the compensation management software's mobile app also extends its usefulness, as reps can access their incentive information on the road.
The few items on Bokan's wish list for the product are cosmetic, such as enhancing the search filtering capabilities. She also said she has had difficulty setting up reports on occasion, but Xactly's support team has been "very responsive in helping me get it to work."
Although she is on the East Coast and Xactly is out west, she said she usually receives a response to a ticket within a few hours. There is also a support contact on the East Coast for urgent inquiries.
Xactly's CEO and founder Christopher Cabrera said the compensation management software features "what-if" scenario planning capabilities that sales reps can use to calculate the expected incentive for a given sale in advance, which could help to "dangle the carrot." Although Draeger has not yet taken advantage of this function because Xactly isn't integrated with the organization's Microsoft Dynamics CRM system, Bokan said it's on the horizon.
"There's a lot of thought that needs to go into how we can leverage the two systems together, and I think that's part of the reason we haven't done it yet," she said. Xactly is also not integrated with Draeger's ADP payroll system; rather, a data export/import process does the job, Bokan said.
Incentive compensation extended beyond sales, executives
Pombriant classified Xactly and Callidus as newer, independent vendors that are shifting the traditional definition of incentive compensation management. While the older options on the market, often included in larger HCM or ERP packages, treat compensation management as a back-office function used primarily for executives, newer vendors view it as a front-office function that can be implemented across the workforce, he explained.
And extending incentive compensation to all workers might make more sense than HR leaders think. Pombriant pointed out that while most workers earn bonuses, the incentives don't always further the organization's interests. "The bonus, rather than being something that is used to incentivize and drive particular behavior at work, becomes a reward for whatever you happened to do, which might not be what the CEO needed or wanted you to do," he said. "So the [incentive compensation] approach makes it a lot more prescriptive."
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Pombriant also said there's ample opportunity to use gamification in conjunction with compensation management software. "Too often we say we compensate with money or we do gamification but we don't do both, but there's no reason why you can't," he said. "Part of incentive comp could be developing expertise, and those [goals] lend themselves naturally to a gamification mode where people are awarded badges as well as money. I think over time we'll see gamification and incentive comp emerging in all kinds of job particulars."
He listed a few best practices from compensation management in sales that organizations can apply more broadly. "It's very important whenever you're setting incentive compensation to be very clear about the objectives and the behavior necessary to achieve those objectives." Pombriant stressed the importance of this step outside the realm of sales, where goals aren't as concrete as dollar amounts.
In addition, companies should be explicit about compensation plans and how they correspond to goals, and the mechanism for evaluation. He said business leaders often forget this last step. "It's important to say 'We're going to evaluate you weekly on your sales forecast or quarterly on your results or in some other way, and here are the metrics we're going to use,'" he said.
Bokan recommended that compensation managers train themselves well on new systems and get deeply familiar with incentive compensation plans. "As an administrator, you have to understand how the plans work in order to implement something. If you don't, then you're going to run into a whole bunch of issues," she said. "And be patient -- it's not something you're going to turn on with the switch of a button."