A system of financial incentives, bonuses, and commissions often serves as a strategic tool to keep the behavior of a company’s sales team into line with the firm’s goals. Companies need to motivate sales employees, sell a particular product, or reach the goals set in their compensation plans. To these ends, companies increasingly use variable compensation plans – like pay for performance – instead of fixed salaries. Companies are linking compensation to their goals more and more. And they are paying bonuses and offering profit sharing instead of paying proportionate, fixed salaries. Company goals and strategies are continuously adjusted and distribution channels change; the sales team no longer consists only of a company’s own employees, but also of partner and dealer employees. Given this environment, it’s no easy task to tune individual compensation agreements to a company’s goals, let alone control and administer them.
Many of the commission management applications available today – often called incentive and commission management (ICM) or enterprise incentive management (EIM) – can’t meet these new requirements. Such solutions often involve inflexible, in-house development that can’t map the complex processes of calculating commissions or adjust the compensation plans quickly and flexibly to new demands. SAP Incentive and Commission Management enables companies to control their sales with monetary or nonmonetary incentives and to manage the related procedures, agreements, and data efficiently. The solution covers all common and familiar forms of compensation plans.
Compensation plans and commission recipients
SAP Incentive and Commission Management can treat contract commission partners as individual persons, a team, or an organizational unit for whom a commission is calculated and to whom it is paid. This approach enables a company to define its own sales staff and external sales partners, such as dealers, agents, or distribution partners. You can use an organizational hierarchy to derive variable compensation easily for indirect recipients of commissions. The organizational hierarchy makes it easy to determine the superior manager for a sales team’s close. If the commission rules state that the manager shares in sales employees’ close, SAP Incentive and Commission Management also calculates the manger’s commission.
A two-step contract construct for compensation
The SAP solution manages compensation plans as commission contracts. The contracts regulate the relationship between the contractual partners and the company and contain all the commission-relevant agreements, such as the role of a participant (who shares in the commission), commission-relevant business processes, fixed compensation, guarantees, or settlement information. SAP Incentive and Commission Management stores a two-step contract construct for maximum flexibility with individual or companywide modifications of commission agreements.
In the first step, the standard commission contract contains agreements valid for a specific organizational unit within the company, such as sales region, sales, or dealer groups, or production units. If a product is advertised as part of a campaign, the company might increase the commission rate for the length of the campaign. Shelf warmers receive higher commission rates, and special conditions apply to the introduction of new products. All such modifications to the standard commission contract automatically affect all the related, individual commission contracts. Standard contracts serve as templates and enable quick adjustment of modifications that affect several recipients or commission or company units.
In the second step, a commission contract is assigned to the recipient. In addition to the agreements of the standard contract, the commission contract contains individual agreements between a company and a recipient, such as guarantees for a specific break-in period or situations in which the commission should be calculated or paid.
This two-step contract construct also enables simple administration of compensation plans in sales organizations that are not that complex. One or more standard contracts store commission plans valid throughout a company and are modified as needed. The modifications directly affect all the individual contracts that belong to the standard contract. Individual contracts can also be modified to take account of changed situations.
Flexible calculation of commissions
The heart of SAP Incentive and Commission Management is a tool that calculates the commission. A specific commission case is generally derived from the business processes relevant to commissions in upstream system. Users must clarify the basis upon which variable compensation is to be calculated: from the quantities or values of sales orders, from the aggregated sales numbers for a given month, or from another model. The software automatically calculates the commission. Data imported from an upstream system via an incoming interface is stored as “grade A.” This data triggers the calculation of a commission. The calculation then runs through four steps.
- Determine participants. Data on direct participants is transferred at the incoming interface. Indirect participants might include managers compensated after an employee’s successful close and are determined based upon the information from the commission contracts and, in some cases, the organizational hierarchy.
- Valuate object. The business object is valuated independently of the recipient. For example, the valuation of an object offers an option to force a higher valuation of sales activities for a strategically important product as part of a campaign.
- Calculate compensation. The software calculates the compensation of individual recipients, including the due dates and liability amounts. Compensation can be either monetary or nonmonetary.
- Post. The results of these process steps are updated in the database as commission documents.
A commission case that can’t be completely calculated successfully is held aside as a floater for manual follow-up processing.
Close and settlement runs occur at the end of a period. The close run calculates the flat-rate compensation, guarantees, and bonuses due and posts them to the commission account. The settlement run (the settlement of commissions with the SAP financials or payroll components) periodically determines the payment amounts and transfers them to the payment systems. The run also considers cancellation reserves (funds for orders that might be cancelled) and data on due dates.
Transparency for commission recipients and managers
SAP Incentive and Commission Management uses calculated and stored data to provide employees, partners, and mangers with up-to-date, transparent information. Reporting offers various user groups diverse evaluations and an option to trace individual commission cases. SAP Incentive and Commission Management can also simulate commissions for individual cases for analysis or for what-if scenarios. If the commission results are transferred to SAP Business Intelligence the data is available there for unlimited analyses. SAP Incentive and Commission Management is integrated with upstream and downstream systems. Data relevant for commission management from SAP sales systems is automatically transferred as commission cases; the commission results can be transferred to the SAP financials or human capital management components.
SAP Incentive and Commission Management is clearly separated from other operative SAP systems. The option of setting up secure interfaces to upstream and downstream systems by release increases bandwidth and the value of the application’s benefits. In companies with heterogeneous account systems, SAP Incentive and Commission Management offers the advantage of centralizing all data relevant to commissions and bonuses. This feature guarantees correct presentation of compensation at any time, regardless of the operating area to which it relates. All processes are automated, which leads to increased efficiency for administration. Shorter processing times and improved transparency lead to increased motivation among employees and partners.
Incentive and commission management software is currently used primarily to manage the incentive plans of sales employees. But the trend in many companies is to introduce variable compensation plans for employees in other areas of the firm.