June 20 by Sarah Van Caster
Traditional economic theory dictates humans are logical and rational. We are predictable, self-interested creatures concerned with outcomes that best suit us. However, in the mid-twentieth century, this conventional notion was challenged and a new discipline of economics was born: behavioral economics. Through this field of study, we found that human decision-making, while, still predictable, is actually predictably irrational.
Think about your own behavior. Do you always do what is best for you, or do you occasionally make choices that are not in your best interest? Behavioral economics helps us understand why we under-save for retirement, why our New Year’s resolutions fall by the wayside, and why we often make decisions based on experience rather than reason. And all of this matters in the business world because employees, partners, and customers are all humans, and by nature, dependable irrational. To overcome this, and successfully drive behaviors that align with business objectives, we use incentives.
Managing incentives is a challenge all companies have and incentives are often one of the largest costs of an organization. U.S organizations spend more than $1 Trillion each year on influencing behaviors through incentives. Unquestionably, it is imperative to manage these high costs efficiently and in complex enterprises today, this is often not so easy. Incentives include a broad array of motivational techniques including sales compensation, SPIFFs, contents, rebate programs, promotional campaigns, etc. Often these programs are decentralized across the business and when they are evaluated together, many times there are not only disconnects in programs, but some may be in direct conflict.
“Irrational passions would seem to be as much a part of human nature as reason”
For example, let’s say your organization’s top initiative for the year is increasing margins. Currently, there is a promotional campaign for customers to encourage purchases from your newest product line. However, this new line is a discount brand with low margins. Additionally, the sales organization’s compensation plan is focused on maximizing revenue. They are not motivated to sell the new line because they know it will take them longer to hit their number. It makes no difference to them if they offer deep discounts to get a sale, so they do what it takes to close the deal, thereby sacrificing margin. These two incentive programs are disconnected from one another, and more importantly, paradoxical from the organization’s top priority.
Many organizations are reassessing incentive programs and determining whether some efficiencies can be gained by considering more automated, centralized solutions. Often, incentive programs are managed manually, but this option comes with common issues – human error, scalability, compliance, minimal visibility, etc. There is a lot of complexity with modern incentive programs and this is why disparate programs are managed by multiple, siloed areas of the business. But, the technology is now available to streamline this process, improve performance and integrate incentives, rebates and promotions into sales, contract and revenue processes that work in concert and drive business outcomes. This is a powerful opportunity for many organizations to increase operational efficiencies, improve go-to-market execution and drive revenue.
Steve Brooks, former CIO and current Editor at Enterprise Times, presented on this topic at Accelerate and discussed four key benefits that he sees from modern incentives solutions.
The benefits of a single, integrated solution deliver several advantages around simplicity and reducing administrative costs. Spreadsheets and manual efforts have been the de facto method of managing incentives for years, but over time, these spreadsheets tend to morph into massive files with countless tabs and broken links that require more time and effort than they are worth. As businesses evolve and departments grow, acquisitions happen, etc., a standardized, more automated process is required. Automated solutions not only simplify the administration process, they also remove the data silos that are created through having separate incentive programs for partner channels, sales teams and customers. This frees up time for IT and compensation teams who, instead of having to focus on integrating data, can spend more time on value-add activities for the business like innovation and creativity.
The complex legislative landscape across the globe for different industries is a challenge when creating sales compensation plans, promotional campaigns and rebate programs. For example, while common practice in the U.S., offering premiums in Germany is completely illegal. Incentives also have cultural implications. In Malaysia, gambling is culturally frowned upon and sweepstakes are considered gambling. If you try to run a sweepstakes program, you may damage your brand reputation. Regulations and cultural biases vary by country and region and the ability to build and maintain rule structures with a solution is imperative. By centralizing all incentive programs in a single location, legislative requirements can be mapped into the system and updated whenever necessary.
A single source of sales, compensation, rebate and promotion data allows analytics to deliver insights to incentive programs that are and are not working. Analytics provide instant visibility to the impact of incentives on sales and profits across different channels and allow comparisons between programs to confirm they are aligned and driving desired behaviors. Predictive analytics and machine learning take these capabilities even further and do not just provide insights, but can recommend optimal incentive programs that cross all channels and align to organizational objectives. Analytics give businesses the opportunity to react faster to organizational, cultural, regulatory and market changes and be more prescriptive with incentive programs than ever before.
Typical advantages of cloud-based solutions, i.e. scalability, and the ability to evaluate from anywhere, anytime, anyplace, etc., apply in the context of incentives solutions, but security has always been a paramount concern with these programs. Security in the cloud has finally surpassed on-premise capabilities and this is huge for incentive programs. With different teams requiring visibility into channel partner/customer/internal sales compensation and promotions, strict security models are always required. With cloud solutions now able to handle this, the timing is better than ever to consider automated incentives solutions.
For more information, visit Apttus Incentives.