Intuitively, most people realize that an effective compensation system is vital for sales and business success. When performance measures relate directly to business goals, sales reps — and others with a variable compensation component — are motivated to sell more, increasing corporate revenues and profits. But, it’s often difficult for small and medium-size businesses (SMBs) to execute well in this area. Although very large companies may be able to deploy and manage sales compensation applications, few SMBs have the money or expertise to manage these solutions in house. As a result, the vast majority of SMBs rely on non-automated methods to manage sales compensation—tackling the job with Excel spreadsheets and a messy mix of e-mails, paper documents and manual processing. Besides being a headache for everyone involved, this cumbersome approach has many other drawbacks, such as limited audit and reporting abilities, high error rates, no real-time visibility or collaboration capabilities, and a lack of flexibility. So What’s Wrong With Excel? Experts estimate that up to 90 percent of today’s SMBs have yet to find the right tool to effectively manage sales compensation. Today, the vast majority relies on a disjointed combination of Excel spreadsheets, e-mail, and manual and paper-based methods to manage the sales compensation function. These jury-rigged solutions don’t deliver the visibility, intelligence or flexibility necessary to motivate salespeople and other variably paid employees, or to ensure optimum results. As many companies have learned the hard way, this approach is— Complex and time consuming. It can take an inordinate amount of time and effort to set up all but the most rudimentary compensation plans in Excel. Administrators typically must circulate paper plans through the sign-off process. Because the process is so tedious, many companies end up creating non-strategic compensation plans instead of designing plans that pay differently for product mix, margin or discounting criteria. Others create overly complex plans that are too hard to manage and measure. Hard to share and update. Excel-based methods don’t enable real-time data sharing and updating. When faced with making and disseminating manual, one-off changes, some companies just don’t make them at all—bypassing opportunities to maximize financial returns. Likely to create confusion and conflict. Once these static spreadsheet plans are signed off, they’re likely to be filed away, without the capability to distribute regular updates on progress and performance. Many salespeople waste time doing “shadow accounting” to track commissions—resulting in loss of sales, productivity and revenues. This can also create an adversarial relationship between sales and finance when the numbers don’t agree. Error prone. Most spreadsheet-based plans have been proven to include a three to eight percent error rate. Without built-in error checking for data entry, conversion, and formulas provided by a dedicated commercial compensation application, your data may be less dependable than you think. If you overpay, profitability takes a nosedive. Underpay, and employees will speak up—but may move to greener pastures if the condition becomes chronic. Inadequate for reporting requirements. With an Excel-based approach, the compensation administrator must roll-up sales input from each rep and/or sales manager—a labor and time-intensive process that’s difficult to tailor to different management requirements, and inadequate for meeting auditing and other regulatory requirements. Difficult to extend to third-party channels. As hard as it is to work around these limitations for your internal variable-paid employees, just think how much more complicated it gets when you try to extend the approach to other external, third-party sales partners that you need to compensate. Difficult to model the impact of plan changes. Compensation plans need to change as the business changes. Whether updating quota rates based on projected orders, adding new people or testing new metrics, it is very difficult to model new plans and forecast commissions expense in a spreadsheet paradigm. Companies that stick with the spreadsheet approach end up paying a high price. Instead of getting the return they want from compensation programs, they suffer from missed margin and revenue opportunities, duplication of efforts, and decreased productivity. Software-as-a-Service: The Next Step on Software’s Evolutionary Ladder Because of these limitations, many companies are beginning to deploy a solution designed specifically for the sales compensation function. The first place many SMBs may look at is their current customer relationship management (CRM) solution vendor. Unfortunately, most CRM and sales force automation (SFA) solutions—especially those geared to SMBs—offer little, if any, sales compensation functionality. In fact, some CRM vendors have tried, but abandoned attempts in this area. After all, CRM is about enabling sales reps to track customer opportunities and relationships, while sales compensation is about managing sales hierarchies, thousands of line items, and extensive calculation procession on millions of transactions. Some customers consider packaged or on-premise sales compensation management solutions. However, SMBs often find these products too complex, time-consuming, and too expensive to purchase, deploy, operate and manage. Typically, these solutions cost hundreds of thousands of dollars or more to implement. In worst-case scenarios, implementation is so painful that it fails; turning yet another enterprise application into shelfware. Even in best-case scenarios, these solutions can take months to deploy. Increasingly, however, customers are turning to on-demand, or software-as-a-service (SaaS), as a faster, less expensive and easier way to deploy many types of business solutions, including sales compensation management. In this model, customers get the functionality of enterprise-class solutions without the difficulties, expenses and vagaries associated with traditional on-premise software implementation and maintenance. Instead of requiring customers to purchase, deploy and maintain expensive software, hardware and upgrades, on-demand vendors charge customers an annual subscription fee. This enables SMBs that have historically been underserved by the software industry to run the solutions they need without incurring large upfront costs, or having to hire expensive IT staff. On-demand vendors build their solutions as Web-based services from the ground up. Designed to run on a single instance of the software, these solutions can serve thousands of companies with distributed, load-balanced application servers, and embedded service management and security. As a result, vendors can amortize costs over many customers, providing exceptional economies of scale and skill at every phase of the software lifecycle. Sales Compensation: A New Natural for On-Demand Although any application can shine in the on-demand model, CRM is currently its poster child. The CRM function dovetails well with the on-demand model for several reasons. CRM solutions often support a large number of employees across sales, marketing and/or customer support functions, as well as many mobile, dispersed users in sales and service roles. In addition, companies frequently need to extend CRM processes to external parties, such as channel partners. The CRM market has not been as widely used as the more mature accounting and financial applications. Demand for CRM has grown at the same time many companies began to question the value of deploying and managing new applications. These same factors are now driving demand for SaaS in the sales compensation management area, which shares many similar requirements for flexibility, mobility, collaboration and reporting. In addition, since companies make substantial investments in variable compensation programs, accurately monitoring and reporting these activities is key to ensuring compliance with Sarbanes-Oxley and other regulatory requirements, which require that companies document the internal controls that affect financial reporting. Pure on-demand solutions also deliver benefits that zero in on other specific sales compensation requirements, such as automated electronic compensation plan routing and approvals. An automated approach to sales compensation management makes life easier and saves money and time. A comprehensive, unified compensation management solution allows companies to maximize sales of their most profitable products. For example, incentive programs can compensate differently based on variables, such as product margin, product mix, discount percentages or event accounts receivable. A good sales compensation management solution also allows organizations to gain significant competitive advantage by adjusting sales compensation plans quickly to react to changing market conditions. It also allows sales managers and executives to modify plans easily and introduce special performance incentive funds to outmaneuver the competition. One of the biggest benefits of having a dedicated sales compensation management system in place can't be measured on the balance sheet: It's the trust and confidence that gets built by having an accurate compensation mechanism. Paying correctly and consistently fosters a strong relationship between sales and finance departments; a proper sales compensation management system allows members of a sales team to understand how they are being paid before, during and after they close a deal. They can now spend time selling versus tracking their compensation, knowing that they don't need to spend time poring through spreadsheets to ensure they are being compensated fairly. Identifying the Benefits Businesses of all sizes are under increasing pressure to streamline and automate sales compensation systems. In the past, SMBs, in particular, have been hampered in achieving this goal due to a lack of affordable, easy-to-manage solutions. As a result, many firms use disjointed spreadsheet-based approaches for this function, and never get the level of visibility, flexibility or business intelligence they need to optimize their sales compensation investments. However, subscription-based sales compensation services give companies a new approach—one that offers substantial benefits over homegrown, spreadsheet solutions, and is also much more affordable and easy to implement than traditional on-premise software applications. Over the last few years, businesses are increasingly opting for on-demand solutions in many functional areas. Growing demand for these solutions underscores that the model delivers the benefits that it promises. Using a true, multi-tenant architecture for automated sales compensation management enables companies to quickly and effectively automate the sales compensation process. Taking this approach, SMBs can move beyond spreadsheets to effectively design, deploy, manage, communicate and audit their sales compensation programs—and drive improved top- and bottom-line performance. About the Author Christopher Cabrera is president and CEO of Xactly Corporation, located in San Jose, CA. He is a seasoned executive with more than two decades of successful senior management experience at both early-stage and public companies. At these companies, he has managed sales, marketing, operations and business development. Christopher can be reached at ccabrera@xactlycorp.com.