As companies come under pressure to grow revenue while cutting costs in the current environment, sales commissions are a key lever for incentivizing sales teams while simultaneously increasing productivity on finance teams. New research from Palette on the state of sales commissions in 2023 sheds light on areas of opportunity across the majority of companies.
Commissions are one of the largest expenses for companies with sales teams, averaging 20% to 30% of gross margins, according to Indeed. Palette's research, however, shows that 56% of companies surveyed deal with commission errors on a regular basis. At best, these errors lead to significant overhead as finance and sales ops teams scramble to trace them and make payout adjustments at the end of each period. In many cases, these errors go undetected, undercutting margins on sales. Manual commission calculation processes lead to these commission errors. 71% of companies use legacy tools or spreadsheets for calculations, increasing the likelihood of human error, out-of-date data exports, version control issues, and data reconciliation problems across systems. Automation solves for all of these issues, practically eliminating errors from sales commission calculations.
Academic research shows clear links between comp plan design and revenue growth. In order to iterate and optimize their compensation plans, however, companies must be able to measure them. Palette's research found that the 63% of companies lack access to on-demand reporting on their comp plan performance. Over half of these respondents, or 36%, are able to get some visibility into plan performance after requesting a time-consuming analysis; the rest have no visibility into performance whatsoever. Similarly, 28% of companies never re-assess their comp plans, leaving them vulnerable to market shifts and competitive pressure. Only 37% of companies have full visibility into how changes to their comp plans impact sales performance. Automation solves measurement problems by connecting with CRM, revenue management, and payroll systems to provide an up-to-date picture of current commission statuses; however, only 29% of companies surveyed use a modern automation tool.
While research shows that sales reps are motivated by their earnings, Palette's study found that 41% of companies feel they have ongoing retention issues on their sales teams due to their commission plan structures. Here at Palette we believe in overcompensating top performers and under-compensating bottom performers; only 16% of companies surveyed took this approach. Meanwhile, 25% of reps don't understand their comp plans at all, making it impossible for them to link their sales performance with their earnings potential. This is a huge missed opportunity for sales teams to better incentivize their reps.
The results of the study show how much room there is for optimization with sales compensation across the majority of companies, with the potential for direct impact on margins, revenue growth, productivity, data cleanliness, talent retention, and more. To learn more, read the full report, The State of Sales Compensation 2023.