Automating Variable Compensation: Getting the most out of your Position Design

In variable compensation it is very common to see reference to an entity called ‘position’.  A position is a capacity/role in which a payee functions and for which they receive compensation.  A position often has a name, (like ‘Director of Advanced Widget Sales Northeast’) and a title (like ‘Director’).  Positions often too have a life of their own, that, for example, the Director of Advanced Widget Sales Northeast exists independently of whether Sue or Tom is holding the role.  It may even be empty for a time, but like a physical chair, it does not disintegrate when the sitter stands up.  Object constancy, and all that. 

These position objects are often related to one another, for example that the position ‘Director of Advanced Widget Sales Northeast’ reports to the Vice President of Sales Northeast, or perhaps to the VP of US Widget Sales. This relationship usually looks like a hierarchy, but there are cases where it is more a filtered matrix of some sort, or really it can be as rich and nuanced as the imagination.  It is important to model both positions and their relations accurately to get correct compensation and good analytics.  

When we speak of hard problems in automating variable compensation we are not speaking of cold fusion. Hard problems in variable compensation usually consist of delivering solutions for cases that

1. are outrageously demanding of computational resources
2. have complexity that would shame the famous Rube Goldberg
3. are radically riddled with exceptions
4. All of the above

What follows is a little list, we'll keep it live, of things that have proved difficult.  Sometimes there is a best practice (like "Don't do that!") that will save one from the pitfall.  Othertimes seemingly not.  

One of many topics in the realm of automating variable compensation that deserves extended examination is how to harvest the benefit of flexibility.  While this is a very important thing to get right, it so often falls to the bottom of priority lists and at the end of the day leaves C-level management feeling under-served.  There are a few ways to think about flexibility.  First, is your compensation plan definition and communication prepared organizationally and legally to support multiple changes in a year?  This may or may not be a goal, but some think of flexibility as being able to make changes now, not waiting till the next plan year.  Another way to think about it is the ability to design and deploy very different structures and methods (rapidly) - and ideally without losing important analytical history.  Again, such may not be your particular goal, but, like yoga, flexbility brings other benefits.  When you are very flexible small changes are not big deals because the preparedness for change is embedded end to end in your implementation.

Automating Variable Compensation - an Overview in Q and A form

What is it?

  For the last twenty years, when asked what I do, I've cheerfully replied "I automate Variable Compensation".  Wrinkled brows, blank stares, and courteous inquiry usually follow.  I end up saying "You know, big companies have salespersons who get paid more or less depending on what they sell - commissions, bonuses, draw, etc.".  Eventually the general idea is communicated. Usually saying something about how big the market is helps, pointing out that the volume of this variable compensation often exceeds a billion dollars for given industry leaders.  The majority of folks have never much thought about what the cost of sales adds up to be.

  This practice, of automating variable compensation, has traced its way through the markets as EIM (Enterpise Incentive Management), ICM (Incentive Compensation Management), SPM (Sales Performance Management) and will undoubtedly sprout new acronyms as the old ones lose fashion.  Dynamically continuous variable incentivization?  We have not seen the most amusing chapters, that much is sure.  I'd like to call it VCA, because that's just so cut and dry.