|Managing Sales Compensation in Excel Doesn’t Make “Cents”
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
- 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
- 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
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
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