Incentive Compensation in Modern Revenue Management

Coordinating a Revenue Focus Across the Organization

The Changing Landscape for Incentive Compensation

Incentive compensation management (ICM) systems have traditionally focused on the needs of sales divisions, but these groups are typically distinct from other departments within the organization and are usually compensated based primarily on new sales transactions. For sales, a significant portion of overall compensation is often variable throughout the year. Conversely, for most other employees, incentive compensation is less common, compensation reviews are annual and intra-year adjustments to compensation are rare.

However, many organizations have recognized the value of subscription-based or other recurring revenue, and this gives rise to other sources of revenue beyond traditional new sales. Organizations are broadening the types of revenue to which compensation is linked and are looking beyond the narrow channels of “new business.” As a result, the transactions being compensated are now more diverse and can include retained customers, upsell, cross-sell and expansion into existing accounts, revenue events from additional and indirect sales channels through partners and resellers, and events being generated in new, digital e-commerce channels.

Traditional HR and finance concepts and techniques have been developed to handle the typical employee’s compensation, based on individual MBOs (“management by objective”) and annual reviews. But sales teams are compensated based on the volume and value of sales for which they are individually or jointly responsible. While managing these compensation arrangements is possible using standard HR compensation systems or ad-hoc spreadsheets, many organizations are choosing to use a dedicated application commonly referred to as Incentive Compensation Management (ICM) software. ICM applications are designed to support complex or changing compensation structures and are more appropriate and agile in ways that typical HR and finance systems are not. As the range of employees who are covered by variable compensation plans expands to include all those involved with supporting revenue activities—not just direct sales teams—Ventana Research asserts that through 2024, the revenue management software category will evolve into the essential suite of applications and platform designed for a CRO and supporting organizations to effectively optimize revenue across all channels.

Beyond Sales Operations to Proactive Revenue Management

The traditional sales operations model places new-business sales operations at the forefront as the primary driver of revenue. This structure has its own hiring and compensation processes, and there is often also an attendant corporate culture where the sales teams are elevated in terms of relative importance within the organization.

Companies can no longer afford to focus only on sales operations as rooted solely in new business.

In modern revenue operations, however, changes in sales channels are driving organizations to think beyond the traditional sales operations model and find new approaches to generating and managing revenue. Companies can no longer afford to focus only on sales operations as rooted solely in new business. Equal weight must be given to customer retention and expansion, as well as to newer channels, such as subscription-based recurring revenue and digital commerce, such as B2B software as a service, credit card processing and digital business services. Retaining existing customers becomes vital because it preserves annual recurring revenue and lays the groundwork for future expansion and upsell opportunities. It is important to remember, too, that expansion of sales for an existing customer typically has a lower cost than acquisition of new business.

To achieve and unify these revenue targets, organizations must find new alignment. A proactive revenue management approach offers exactly that alignment, across different groups and teams, spanning teams such as direct and indirect sellers, pre-sales engineers, business development and partner management, and post-sales teams such as customer success, technical support, professional services and marketing. Employees in these revenue supporting activities are seeing their compensation structures moving away from being predominately salary based with annual reviews and bonuses linked to individual objective achievement and toward more base salary and commission models. Any organization wishing to embrace the new imperative must adapt. Organizations need to have a unified approach to setting individual targets and quotas and develop incentive schemes that change behavior to support the wider revenue goals.

As always, marketing teams need to be involved with external demand generation for new leads, but now also with internal and external communications to existing customers. This will create new sales opportunities with existing customers while allowing both horizontal expansion to other parts of the organization and product line extensions.

Organizations must understand the importance of viewing the complete customer journey holistically. It begins with initial brand awareness and extends through buyer engagement, sales, onboarding, implementation and sustained adoption planning. It is crucial that each handover point from one team to another is efficient and tracked to ensure a continuous and positive customer experience. Furthermore, implementation and onboarding should be based on a sustained adoption plan, ensuring that the buying organization sees value in the deployment and use of the product. Existing customer-facing communications should inform line extensions, other use cases and other customer experiences, which will help raise customer awareness of all vendor offerings.

In building out a fully supported customer journey, this approach should include sales partners and expanded sales channels. Even within the B2B marketplace, smaller deals and expansions are now often handled via digital channels, and organizations should recognize that resellers and partners have an important place in this calculation, not only in new sales, but in providing customer service and ensuring retention.

Managed Alignment Across the Organization

We believe that by 2025, only 3 in 10 organizations will have embraced a unified revenue performance management approach to guide leadership and operations. Those that do not will fail to reach their revenue potential. To be successful, organizations must formally recognize that there are now various sources of revenue. Along with that change in perspective, there also needs to be an organization-wide understanding of not just responsibility, but also accountability. Sources of revenue must be viewed holistically to avoid the potential for conflict.

It does appear that organizations are beginning to appreciate the value and embrace the concepts of revenue management and coordinated operations, but the companion need for cultural and emotional change is less well understood. Having a Chief Revenue Officer (CRO) with overall responsibility for revenue management is an important step, but that alone is unlikely to achieve the stated aims if this staffing change is not also accompanied by a change in accountability. Accountability must extend to all teams in sales, support, customer success and marketing. The same ICM processes that are applied to sales can also be applied to other revenue-producing and revenue-supporting teams, and a frictionless and productive customer journey can be heavily influenced by the way compensation and incentives are structured. This should extend even to those teams not typically viewed as being linked to sales.

Integration with HR and Finance Will be Required

In many organizations, sales departments have evolved over time as separate, distinct groups within an organization. Therefore, HR processes have come to include unique, parallel hiring and management tracks for the sales team, separate from those for other roles. This difference between the two tracks has been driven by both the nature of sales compensation and the frequency of adjustment to compensation. In addition, the finance organization has developed similar processes to ensure that variable commission-driven future liabilities are incorporated in their income statement projections based on forecasted sales.

However, as organizations expand into revenue management across a broader range of teams, these more complex compensation programs will need to be integrated with existing HR and finance systems, and both departments will need to adapt. Sales compensation bases and structures will change and integration with finance overall will need to be improved. Sales compensation is typically heavily linked to how much is sold, with commissions calculated on each sale, or is based on achieving particular quotas and targets. In an ICM structure, however, realizing these revenue targets will now require cooperation across finance and operational teams. For HR especially, a coordinated and responsive effort will be required to devise and accommodate incentive and compensation plans that cover not just direct salespersons, but also partners, customer success, marketing and professional services.

Traditional incentive compensation and sales performance have been focused on direct sales, but the modern enterprise has additional sales channels, now especially including digital.

Sales channels must also be taken into account. Traditional incentive compensation and sales performance have been focused on direct sales, but the modern enterprise has additional sales channels, now especially including digital. The modern incentive compensation and management system needs to be dynamic to accommodate these many changes, whether driven by internal or external factors. Externally, change may include market factors, new partnerships and changes in the supporting sales channels themselves. Examples of internal factors are persons leaving an organization, moving within, new hires or organizational restructuring. Furthermore, organizations will need to proactively avoid conflicts between direct sellers and new buying channels, as well as among teams. Organizations should create incentives specifically for direct and partner sellers so that there is no perceived conflict between those groups and any overlapping digital channels.

For employees, easy access to their compensation plans will be key, so that individuals can quickly review information about prospective compensation. One additional benefit of an integrated and informed ICM approach is that it avoids employee reliance on an individual’s own interpretation of compensation by way of personal spreadsheets or back-of-the-envelope calculations. Then, everyone in the organization needs access to the rules, which helps avoid distortion of team or individual behaviors.

To support all of this, reporting should be flexible, especially because flexibility enables operations and management to ensure that individuals across the revenue-supporting teams are performing in a way that contributes to overall goals. This avoids the inadvertent development of independent team goals that may be in conflict with those wider strategic goals. Reports should also be exception based, which helps highlight issues as they occur and supports remedial action as needed. They should also provide audit information for commission calculations, as well as audit trails in line with commission formulas, while they track movement of personnel into, out of and across the organization. In all of this, integration of change must be dynamic, and cannot be one-and-done.

Incentive Compensation Management is an Integrated Approach

Creating the right incentive and compensation plans requires more than a spreadsheet or analytics tool.

ICM is a well-established set of procedures, actions and tools designed to support fair and balanced quotas, compensation, and incentive programs specifically focused to align sales behavior with the organization’s sales targets. The techniques and expertise developed by providers of these systems provide a solid basis for extending this integrated compensation approach across organizations. Creating the right incentive and compensation plans requires more than a spreadsheet or analytics tool as there is the need to utilize data from a variety of source systems—such as ERP, CRM and HR—while also employing specific functionality and pre-defined computations. Balancing compensation that both rewards the right behavior and also supports margin and profitability targets is more easily achieved with a dedicated system. As more teams are included in the revenue generating activities, individual quotas can sum to more than 100%, creating exactly the right incentives. Once set, these incentive and compensation schemes need to be accessible by the affected individuals to ensure the accuracy of any individual’s projected compensation based on expected won deals. This transparency is key to avoid loose “back of the envelope” calculations, since this approach can often negate the incentives’ desired effect.

Any compensation and performance management system should allow quick and easy modification and expansion to support internal changes such as new product and service introductions, new bundles, entry into new markets, and adaptation to merger and acquisition activity. External factors will also come into play, including new competitors, new offerings from existing competitors, regulatory changes, foreign market disruption, currency movements and black swan events. Organizational success requires the flexibility inherent in an ICM approach. With change, compensation plans may need to be recast and employee perceptions may become distorted if individuals are projecting income based on their own interpretations. However, an integrated ICM system can help prevent such problems because it is flexible and supports communicating changes quickly and effectively. The overall result with such an ICM approach is that desirable behavior changes can be encouraged through incentives and targeted compensation.

As additional sources of revenue become the norm, employee compensation needs to be more closely linked to revenue targets. A revenue management approach should look to engage with employees, partners and providers to help guide the process. And this is not “one-and-done,” as leadership needs to receive reports and analysis on a continuous basis that can provide insights as to how results are aligning with intentions and thus make adjustments as needed. This will broaden the scope of incentive compensation beyond traditional sales teams, including all those involved, and help ensure an organization’s revenue growth.