Commission System ROI – Part 1

Commission System ROI – Part 1

After sitting down with a recent customer, looking at how to determine ROI for one of these number crunching, report building systems, I thought I would write this blog.

The intention here is that there are several points that an organization can look for ROI. I will describe, in some detail, what I find to be the top three. Of course there are others -and I suggest everyone email me or blast me, whatever strikes your fancy- with what you feel is best. Now onto the ROI!

When looking at ROI for an incentive compensation management system, one needs to keep their friend, the finance guy in mind. See, finance people really like to see savings. Armed with this knowledge we should start looking for hard dollar cost savings for our ROI justification. The first three that I always look at are:

  1. Reduction in calculation errors
  2. Reduction in shadow accounting
  3. Reduction in FTE for admin

The reason I put the word reduction in there is that it will garner the attention of the finance approver. If you can save them money, you will most likely get project approval. Lets look at that first reduction, reducing calculation errors. This can be a pretty easy estimate or one can get into the detail. Many analysts will say there is roughly a 5 – 6% error rate in commission calculations. If you assume 3% of that on the high side, multiple this by your total commission (then split in half since nobody is perfect) and that is the nugget you will be saving by implementing a commission system.

The more detail-oriented people will track down this information by doing monthly or yearly check of your current payments to what the expectations would be. This type of deep dive can take some time, but it will also point out the specific places where your current errors are occurring so that one can focus on that group.

I ran into a customer that had overpaid 1 person $200,000 dollars and was unable to recover, he simply quit. I think he may have taken a small vacation in a different country. In this case, they had a burning desire to never let that happen again. Luckily many of us don’t get slapped in the face with that kind of error.

What is most prevalent in incorrect commission calculations, and what you most likely will know very well is the under payments. While underpayments aren’t costing you money from too many commissions they will lead us to our second and third ROI items.

Lets get back to the calculations though. I am providing a pretty simple sample:

 

SAMPLE

As you can see, this is a substantial savings, and it is a year over year savings. So by using these numbers, this customer would save $225,000 each year by implementing a new commission system. Depending on your ROI justification percent, you could get all the cost savings you need in this one line.

Last thing I will leave you with. If you do need to do a deep dive on where you could be overpaying, there are two places I would start. First, start with the group that is underpaid. If you wrong in one direction, it could be that you are wrong in the other direction too. So for those people consistently complaining about not getting paid right, look at their suspiciously quite counterparts in the same group.

The second place I would look is a little bit of an exercise. First take the revenue you generate by group. Next take the highest commissioned group. If they don’t match up, and it’s explainable, you should audit the highest commissioned group.

 

 

 

  • On July 22, 2015