- This compensation area can be tricky. Global sales comp is a complex undertaking — particularly so for organizations with multiple business units and/or regions.
- Taming it takes a concerted effort. Effective management and seamless execution of this task require consistency, efficiency and transparency.
- Tools and strategies can help you succeed. Integrated technology systems, adequate local resources and clear policies on currency fluctuations may make administration more manageable.
Global sales compensation administration leaders encounter several challenges when managing systems, reporting, processes and people across multiple business units and countries. These challenges can be exacerbated if the administration model is more decentralized. While some tasks require local administration, 82% of organizations in the Alexander Group’s recent Sales Compensation Trends survey reported using a centralized global team to perform most daily plan administration activities.
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Still, centralized, multinational organizations with multiple business units can frequently run into sales compensation challenges when working at a local level. From technology integration to local resource allocation and currency fluctuations, how do these challenges affect such organizations?
Challenge 1: Technology, Systems Integration and Process
Across numerous countries and jurisdictions, organizations often must navigate different reporting requirements, tax rules and currencies, making it difficult to streamline processes and systems. Various systems — customer relationship management (CRM), enterprise resource planning (ERP), payroll, HR information systems (HRIS) and sales performance management (SPM) — play a critical role and must work in concert to effectively administer a sales compensation program.
Read: The Global Compensation Puzzle
A challenge may arise if systems are set up differently across business units or countries — and may be magnified if different systems are used. Here are two scenarios of how this may play out:
- Scenario 1: Each CRM may handle conversions differently, creating unique steps for different regions and often requiring manual reporting intervention. Any time manual steps are added to the process, the potential for error increases. This also may create inefficiency and further complicate centralized reporting.
- Scenario 2: Payroll timelines are typically different in the U.S. than in other international jurisdictions. As a result, organizations are generally required to run separate administration timelines and ensure compensation policies reflect different timetables. This is an example of where centralization still requires local flexibility to ensure effective sales compensation administration.
Challenge 2: Currency Fluctuations
Another significant factor organizations must consider is how currency fluctuations affect sellers, quotas and crediting. Typically, quotas and crediting are either based on the headquarters’ currency or a local currency. While there is no right or wrong answer as to how an organization may approach this, it is important to be aware of whether the risk is being placed on the seller or the organization. Ultimately, the primary challenge lies in understanding changes in foreign exchange (FX) rates to appropriately manage compensation budgets, track quota performance, provide seller visibility and ensure fair crediting rules.
Most organizations choose to carry the FX rate risk, given sellers do not influence FX fluctuations and organizations can hedge against currency fluctuations. However, some organizations put this risk on sellers, thus creating a perception of unfairness, particularly for individuals who are selling in a currency experiencing significant downward fluctuation relative to the currency at the headquarters (HQ). On the other hand, this can create a tailwind for sellers that is not related to their efforts. Ultimately, placing FX risk on sellers degrades the linkage between pay and performance.
Organizations may use several approaches for establishing quotas and crediting when dealing with multicurrency transactions:
- Credit in the HQ currency at budget rate against an HQ currency quota. With 63.7% of organizations in the Alexander Group survey using this option, it is favored because using the same currency across regions allows for streamlined reporting and creates a common view across sales teams. While currency exchange rate fluctuations do not affect sales performance, the sales are not linked to actual business results.
- Credit in the local currency against a local quota. Chosen by 22.2% of surveyed organizations, this quota and crediting method removes sales team FX risk while also providing a more localized view that aligns with the currency specific to that country. If providing a common view of quota tracking is less important and an organization can handle the complexity, consider this option based on business priorities.
- Credit in the HQ currency at a floating rate. This option, used by 8.3% of surveyed organizations, creates a common view of quota tracking and may align better with financial reporting; however, there is a significant risk of creating negative impacts or unearned upside for the sales team.
- Transact deals in United States dollars outside of the U.S. Only 5.5% of surveyed organizations choose to manage crediting and quotas in this manner, making it the least prevalent crediting method. This method does eliminate the need for sales performance conversion. The critical downside is that customers likely prefer to transact in a local currency and this approach can hinder sales effectiveness.
It is highly important to have a clear policy on how to treat FX rates and understand the negative implications of putting risk on sellers. Best-in-class organizations communicate a clear policy, provide transparency in quota tracking and ultimately ensure sellers are not exposed to the adverse impacts of uncontrollable FX fluctuations in their region.
Are You Up to the Challenge?
Global sales compensation is indeed a complex undertaking — particularly so for organizations with multiple business units and/or regions. Effective management and seamless execution require consistency, efficiency and transparency. Integrated technology systems, adequate local resources and clear policies on currency fluctuations can help global sales compensation administration leaders succeed in this area.
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