The payroll process is a friction-heavy, error-prone one. Most employees in the U.S. have been negatively affected by a payroll error, according to research from Kronos Inc.’s The Workforce Institute, which also found that nearly half of professionals agreed they would start looking for a new place of employment after just two payroll errors.
The stakes for employee compensation accuracy are high, and it’s just one reason why the enterprise is beginning to upgrade its payroll systems and experiment with new technologies, from payroll cards to shifting pay schedules.
However, salary or hourly payouts are only one piece of the employee compensation landscape, and new research from Xactly shows that another piece, sales compensation and incentive commission, is also struggling with manual processes and high error rates.
In its latest report, published this week, Xactly found that 83 percent of companies have inaccuracies in their sales compensation payments — an average error rate of more than 5 percent, the company said. A company with revenues of $100 million would lose millions, even if they reduced their error rate down to just 1 percent.
The sales compensation space, though, is similarly enjoying its own moment in the innovation spotlight. According to Xactly Vice President Erik Charles, sales comp is no longer just about providing a sales representative with a financial incentive to improve performance.
“We’re up to the point where 25 percent of the people we pay out of our software are not in sales,” Charles recently told PYMNTS in an interview. “Variable compensation [and] variable incentives that are measured with hard, concrete metrics are becoming more and more popular across the enterprise.”
That means anyone from engineering to talent recruiters can be on an organization’s variable-pay compensation plan as companies look for more effective ways to boost employee performance.
The most effective of these plans, Charles explained, are those that clearly communicate employee expectations. However, one of the largest challenges of this space is the fact that so many teams in the enterprise have their own incentives to add to these programs — sales, finance and HR teams have a hand in how sales comp programs are designed. Charles noted that this makes for complex compensation calculations, but it’s not the only reason why these programs are a challenge leading to high error rates.
Lengthy payout schedules— most companies surveyed by Xactly said they can take between two and six weeks to pay these incentives — can promote high sales representative turnover, an expensive trend that requires resources to shift toward hiring and training instead of more strategic initiatives. Whereas commission is designed to motivate employees, “sitting on a commission check is a de-motivator,” Charles said.
Furthermore, incentive compensation programs are varied, and companies can choose to add so-called accelerators for high-performance employees who meet and exceed quota.
Companies often struggle to manage all these challenges and nuances of their compensation programs on excel spreadsheets, leaving no wonder as to why error rates can be so high. In addition to frustrated employees, Charles explained that these mistakes can have a major impact on company financials.
“If you’re modeling things out, companies can fail in commission forecasting and end up having to restate their earnings,” he said.
The ins and outs of developing incentive compensation programs are intricate, to say the least, but proper development is paramount to employee productivity, corporate growth and ensuring an ROI on the program. And with more businesses choosing to deploy these programs for professionals outside of the sales team, being able to measure employee success with hard metrics, then gain visibility and control over incentivized compensation, is just as important as ensuring employees’ payroll checks are accurate and on time.
Unfortunately, “a lot of companies do a terrible job explaining to employees exactly what they want them to focus on,” Charles said. “They say, ‘We want you to be a good X,’ but they don’t define what X is or how it will be measured.”
Demand for more accurate measurement of employee success and, therefore, how much those employees should be compensated is promoting innovation in this area of payroll and corporate finance, Charles noted. Sales representatives and other professionals are demanding greater visibility and predictability into how much they will be paid if any given deal closes. Today, technology enables those workers to gain that information from right within their customer relationship management (CRM) systems.
Charles added that many sales representatives and other professionals who partake in an incentive compensation program are calling for enhanced mobile support, allowing workers to view and manage their compensation programs and earnings on their phones.
Unless corporates get a handle on the development and deployment of their programs, providing clear expectations and compensation calculations, these programs can quickly go awry.
“The biggest problem is that comp plans are too complicated,” Charles said. “You have this comp plan with all of these different measures, and it’s complex.”
To test this, he said he will sometimes speak with a sales representative and ask how much they would make if any given deal closes.
“If they can’t answer immediately, I know there’s a problem with the comp plan,” he said.