What is a Sales Compensation Budget Risk Analysis and Why is it Important?
October 9, 2023
One of the most challenging aspects of utilizing a sales compensation plan that does not have a fixed budget is that, too often, the plan ends up paying more or less than expected. While less effective sales compensation plans such as forced rank provide the ability to know the total that will be paid out in advance, more effective and equitable sales compensation plans such as goal and commission do not, which can result in such designs not being utilized or payouts under such designs being higher or lower than expected. However, biopharma companies can eliminate this risk while utilizing these more equitable plan designs by running a budget risk analysis of their sales compensation plan. In this blog post, we will explore what a budget risk analysis is and what its primary benefits are.
What is a Budget Risk Analysis?
A budget risk analysis utilizes simulations to project the total expected payout under the sales compensation plan at various levels of national performance. Consider the below budget risk analysis:
This budget risk analysis indicates that if the company achieves 100% of the national goal, then the plan is projected to pay out 105% of the sales compensation budget; if the company achieves 105% of the national goal, then the plan is projected to pay out 115% of the sales compensation budget; and so on.
Now that we’ve established what a budget risk analysis is, let’s explore its primary three benefits.
Benefits of Budget Risk Analysis
The three primary benefits of a budget risk analysis are:
Benefit 1:
Anticipate how much plan will cost before implementation
Benefit 2:
Ensure plan payouts are both motivating & fiscally responsible
Benefit 3:
Assess financial impact of different plan design variations
Let’s explore each of these benefits in greater detail.
Benefit 1: Anticipate How Much Plan Will Cost Before Implementation
One of the most important benefits of a budget risk analysis is that it projects how much will be paid out under the sales compensation plan before implementation for those plan designs that do not have a fixed budget. Thus, while many biopharma companies adopt the more ineffective forced rank sales compensation plan due to its fixed budget, a budget risk analysis extends this feature to more motivating and equitable plans such as goal and commission, thereby allowing companies that are seeking a fixed budget to implement more effective sales compensation plans.
Benefit 2: Ensure Plan Payouts are Both Motivating & Fiscally Responsible
Another key benefit of a budget risk analysis is that it helps companies ensure that payouts under the sales compensation plan are both motivating and fiscally responsible. For example, if a budget risk analysis shows that 80% of the sales compensation budget will be paid out at 100% national attainment, then the payout curve can be made richer in order to ensure that members of the sales force are being rewarded for their performance. Alternatively, if a budget risk analysis shows that 120% of the sales compensation budget will be paid out at 100% national attainment, then the payout curve can be adjusted to ensure fiscal responsibility.
Benefit 3: Assess Financial Impact of Different Plan Design Variations
The third primary benefit of a budget risk analysis is that it allows sales compensation plan designers and management to assess the financial impact of alternative plan designs. What is the financial impact if we lower the payout threshold from 90% attainment to 80% attainment? What is the financial impact if we make the payout curve steeper between 90% attainment and 110% attainment? A budget risk analysis allows companies to easily assess the impact of variations such as these in order to ensure that the sales compensation plan achieves the company’s goals and drives the desired behavior from the sales force.
Conclusion
A budget risk analysis is a vital part of the sales compensation design process that projects the cost of the sales compensation plan at various levels of national performance. Not only does a budget risk analysis help companies anticipate the cost of their plan in advance, but it also helps companies ensure payouts are both motivating and fiscally responsible, and helps companies assess the financial impact of plan design variations. Request a free consultation with us today to learn more about running a budget risk analysis of your sales compensation plan!
