Everything is developing quicker and quicker. Businesses are moving rapidly, innovation from today is outpaced tomorrow, market needs shift, as does daily life. These occasions go hand in hand with changing desires and expectations of individuals, both privately as well as in business.
As a reaction to this, company strategies are changing towards an era of a full customer experience.
It’s only natural that the sales process is also changing. Since the customer experience heavily influences buying decisions, salespeople need to provide the CX desired – and basically expected in today’s world. Variable compensation is key to keeping sales professionals motivated and engaged in this new normal.
What is variable compensation and how do new business models influence it?
Variable compensation, also known as variable pay, is an incentive on top of a base salary that’s used to motivate and retain employees. Variable pay is based on employee performance. When a salesperson meets or exceeds their quota, variable compensation gives them a boost to their salary.
Variable compensation is also referred to as:
- Variable pay
- Incentive pay
Due to changing business models, like subscription-based models or cloud-only companies, sales processes change into winning small deals, increasing the share of wallet at the respective customer, and renewing the contract; hopefully, with an upsell of products.
This is in stark contrast with huge deals focused on the selling and negotiating part itself. This leads to new streams of revenue generation and new roles within the sales function, with sales specialists focusing on different elements and cycles of the sales process.
In other words, the sales environment is getting more and more complex, both internally and externally, while salespeople are already responsible for one of the biggest – if not THE biggest – cost factor in the budgets and books of several companies in the markets. On average, they account for 10% of sales revenue, with up to 40% in certain B2B-industries.
Don’t forget: Salespeople are THE connection point between the customer and the company. Therefore, they are THE differentiator from competition in the market for a company.
Motivating and empowering sales professionals to deliver their best performance possible, variable compensation becomes part of the selling game, addressing challenges and offering huge benefits for companies making the right use of it.
53% of sales operations professionals feel that their active compensation systems cause a competitive disadvantage for the company. One of the root causes of this frustration is the fact that 60% of these individuals work with multiple compensation systems at once, including spreadsheets and homegrown solutions.
Consolidating to one single source of truth would help these professionals to get one huge step closer towards actually benefitting as a company from paying variable compensation.
What are the benefits of variable compensation?
The right usage of variable compensation comes with several benefits for an organization:
- It can be used as a means to align the organization: change management is an important part of every transformation; new sales models and processes are not an exception. By selecting the right goals and KPIs, variable compensation can help align the organization closer with its change management approach, tying together the desired outcomes.
- The ability to strategically steer salespeople: The relevant goals and KPIs for the payout of variable compensation can be used to drive sales behavior, placing focus on certain products, specific customers, and lines of business, etc. in favor of the long-term aspired company targets. This guides and empowers employees to deliver alongside these strategic goals, adding more revenue to the top line and increasing the margin of their sales deals. There are proven customer cases at SAP about companies achieving 40% growth of revenue thanks to the introduction of a Commission Management Solution.
- The ability to steer employees towards qualitative achievements: Achieve higher customer satisfaction or higher adoption of CRM systems if the goals are set up in the corresponding way. As human beings, we feel intrinsic motivation to a certain extent, but financial incentives like variable compensation are increasing this intrinsic motivation. Variable compensation is proven to lead to higher productivity and profitability, having a positive effect on both quantitative and qualitative performance. People are motivated to go the extra mile, ultimately increasing top-line growth and bottom-line reduction. 87% of respondents are convinced that variable pay is an incentive for higher performance. Additionally, it was found that high income is gaining more importance again, especially in younger generations (like Generation Z), making variable compensation an important tool to prepare an organization for the future in regard to acquiring and retaining talent.
- Variable compensation is an important part of talent management. An underestimated differentiator from competitors is setting compensation up right, empowering organizations to win the best talents in the market – now and in the future.
- Create a culture of performance. Human beings naturally want to be valued, and need confirmation that what they do is appreciated. Implementing a culture of winning by setting demanding but achievable targets motivates people, triggering the emotions of being wanting to be successful and gaining recognition. Competitions between teams or individuals can motivate salespeople to go above and beyond.
Are there any downsides of variable compensation?
With every benefit, there are some cautions to be aware of:
- Studies show that withdrawing rewarding elements once installed leads to a significant decrease of performance. This isn’t happening because of withdrawing the reward per se. The underlying root cause for the decrease of performance is usually a lack of communication about why changes are made and how they are justified. Oftentimes, the reasons are not clear to those affected. People might feel slighted, likely resulting in acts of defiance.
- Variable compensation can also cause negative effects when not set up the right way. There’s no one perfect method of how to set up variable pay correctly, since the success depends on multiple variables. In general, it’s fair to say that unattainable goals, quotas, and KPIs are demotivating. Contradictory goals between different roles and departments can additionally lead to more silos and less collaboration within an organization, slowing the overall growth and ultimately worsening the overall experience for the customer.
- Lastly, variable compensation has to be easily understandable and always transparent. Salespeople have to know what they’re getting paid for, how much they’re getting paid right now, which deals contributed to achieving their goals, how they contributed to the payment amount, how they’re doing regarding their KPI-fulfillment, and where they have gaps they can fill to quickly earn more money.
Simply stated: due to the rate of change in business and society, variable pay is becoming more important than ever before, and companies that don’t consider it will be left behind.
Did you see parallels to your current situation? Did you catch yourself wanting to discuss how you can benefit from variable compensation? Are you interested in hearing more? Find some more information about the studies and which role SAP Commissions can play in this here. Or just reach out to me and let’s discuss about variable compensation together; it’s more important than you might think.