Gaming the Commission System

Companies develop incentive plans for one reason: to increase sales and profits. Unfortunately, even the best designed plans may not produce those results. On paper, commission plans may make sense; but the key to their success is execution.

Over the past ten years, Glocent’s solutions support group has encountered countless pitfalls in clients’ incentive compensation management (ICM) models. While we have encountered hundreds of different plans, containing very sophisticated and complex business rules, many have one thing in common: they are only as effective as a sales force perceives them to be. Below are several examples of how the best-laid plans have been undermined by human nature:

Zero-Sum Sales:

If your company provides a recurring service or product delivery to a customer, and recurring incentives are attached to the support of that ongoing activity, you may be susceptible to this game. Perhaps you offer a telephone, cable, satellite or other type of a subscribed service. Within that service, you offer multiple features or options that can be added to that service. Sales people may realize that simply by cross-selling one option for another your ICM solution reflects that transaction as a new sale, even though additional revenues are not generated.

Artificial Sales:

Similar to zero-sum sales, artificial sales are common among industries where recurring services or products are provided. Two types, in particular, can have a dramatic impact on a company’s profitability:
1) Perhaps a subscriber is moving from one residence to a different one. In multiple instances Customer Service Reps discovered that by entering the new service order in one pay cycle, and then entering the disconnect order in the following pay cycle, the ICM process viewed the new service order as a qualifying commissionable event. The disconnect order that followed was recorded as a lost customer.

In this case, money was paid for an artificial sale, and the data coming from that transaction created a false accounting of the actual event.

2) Another instance where a sale is viewed incorrectly because of the sales person’s gaming of the system can occur when sales reps are paid based on subscription terms. This can occur if a sale rep is compensated based on new subscription rates versus recurring rates. Let’s assume that a sales rep receives $1000 by selling a new subscription for a service that lasts a minimum of four months. If the subscriber remains active for a year, the sales rep will receive an additional $300 for simply nurturing the customer. An astute sales rep, however, will quickly see the flaw behind this model if the ICM solution is not able recognize her gaming of the system.

In one instance, the sales reps created agreements with their customers to cancel the service after the initial four months. Then during the next commission cycle, the client business ordered the same service, perhaps under a different contact name, etc. generating a new $1,000 commission. Because of the limitations of the company’s previous ICM solution, this behavior was never detected; and the company lost thousands of dollars in artificial sales.

Loss-Leader Sales:

In one instance, Glocent analysts found a company where its sales tracking tool was so limited that it could not detect that the company’s own commission rules were set up to promote the sales of loss-leader products and avoid high-margin sales.

The sales plan called for a flat percentage payment based on revenue. They process used to determine the commission did not account for the cost or value of a sale, only the revenue it created. When the marketing team decided to use loss-leader items to introduce a new, high-margin product, there was no control in place to evaluate the dependency of the high-margin sale upon the loss-leader sale.

The sales team soon realized that they were getting paid the same commission rate for easy sales as more difficult sales. The company ultimately paid a significant amount of commissions on sales that actually cost it money. The net results included: unnecessary sales expenses, a delay in introducing a new, high-margin product, unexpected inventory costs and increased mistrust of the incentive process.

The only way to avoid this kind of system gaming is to deploy a solution that can track sales transactions that involve mutually-dependent products, or as Glocent considers such cases, virtual products.