Companies develop sales 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’ sales compensation management (SCM) 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:
If your company provides a recurring service or product delivery to a customer, and recurring commissions are attached to the support of that ongoing activity, you may be susceptible to this game. Perhaps you offer a telephone, cable, magazine, software or other type of a subscribed service. Within that service, you offer multiple features or options that can be added to, or deleted from, that service. Sales people may realize that simply by cross-selling one option for another your SCM solution reflects that transaction as a new sale, even though additional revenues are not generated.
In one case, a cable operator realized that its sales force had discovered that exchanging premium channels was being reflected as a new sale in its billing system. So, when a promotion for one service was about to end, sales reps would convince customers to exchange the current premium service for another. The company would lose money on two fronts. First, just as a promotional rate was about to expire and the normal rate should kick in, the service would be cancelled. Second, the company was paying commissions on a transaction that produced no new revenues.
Glocent’s capability to catch such zero-sum transactions not only eliminated this practice; but it opened possibilities to tie incentive payments more directly to the actual business value of each transaction.
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. Before installing Glocent, the client had no idea that this very common process was being falsely recorded and generating unwarranted incentive payments. Customer Service Reps discovered that by entering the new activation service order in one pay cycle, and then entering the disconnect order for the previous address in the following pay cycle, the previous SCM process viewed the new service order as a qualifying commissionable event. The disconnect order that followed was recorded as a lost customer. The client had no means to tie the two events to the same 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. Imagine if you had a customer base of 5 million, and only 10 percent of those customers moved during the time they subscribed to your service; that would generate 500,000 artificial sales. In many cases, such commission plans call for a loaded commission when the sale is made, and then recurring commissions for as long as the customer remains active. If the service is valued at $1,000 a year, we can assume that at least a twenty percent commission would be applied. 500,000 artificial sales, at $200 each, amounts to a real loss of $10 million. What would it be worth to you to prevent such behavior and the associated lost revenue, let alone the skewed information it creates?
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 $1,000 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 SCM solution is not able recognize her gaming 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 commissions solution, this behavior was never detected; and the company lost thousands of dollars in artificial sales.
In one instance, Glocent analysts worked with 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. The 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 for 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. Glocent’s unlimited flexibility allows clients to apply very complex conditions to the sales qualification criteria. This was done by design to prevent anyone from taking advantage of a flawed process or solution. In several cases, our clients recovered the cost of Glocent as soon as it was put into production simply because of uncovering how the sales force had been gaming their current process.