Incentive Compensation Management Challenges & Technology: Considerations for the Financial Services Industry
Part 2: Operations & Administration
INCENTIVE COMPENSATION MANAGEMENT CHALLENGES & TECHNOLOGY: CONSIDERATIONS FOR THE FINANCIAL SERVICES INDUSTRY
Part 2: Operations & Administration
By: David Johnston, Incentive Compensation Expert
In Part 1 of this two-part report, we covered five strategic and analytical factors that must be considered in decisions regarding the acquisition of an Incentive Compensation Management (ICM) solution for companies in the financial services industry. In addition to those five factors, there are also operational and administration challenges that are equally important when evaluating ICM solutions. In this report we address the following five challenges:
- Managing Plans Across Multiple Lines of Business
- Transaction Volume & Assignments/Crediting
- Tracking Assignments/Credits & Referrals
- Higher Standards for Regulatory Compliance
- Deploying Incentive Compensation Plans
CHALLENGE 1 | Managing Plans Across Multiple Lines of Business
A critical objective of most banks is to be able to measure performance program efficiency by rolling up revenues and incentive costs to assess the total cost of the incentive compensation program. This ratio provides an effective measure of incentive compensation management but is difficult to achieve. Banks are composed of many divisions, such as Commercial and Retail Banking, Wealth Management, Insurance, and Mortgages. Each of these group manages their plans and utilizes a patchwork of systems to track, calculate payouts, and provide payroll outputs to ensure that participants receive their incentives.
Further, they have grown through acquisition and all too often the incentive plans become grandfathered on their systems, increasing the makeshift nature of the program administration. These methods also include manual and spreadsheet processes that are fraught with input or calculation errors, difficulty integrating data, and inconsistency of payouts. This is exacerbated by the number and complexity of the plans in all the bank divisions.
 ICM Technology Alignment & Considerations:
ICM solutions provide the ability to catalog all plans to be administered in the solution, creating uniformity and harmonization across different business units and facilitating the development of consistent processes for efficient, ongoing plan management.
Although these solutions offer a uniform approach to managing incentive plans, solutions have varying architectures and needs to be evaluated against anticipated levels of complexity. In addition to the harmonization of plans from a configuration standpoint, these systems also give administrators the ability to roll up revenues and compensation expense costs at a divisional and corporate level for performance reporting, which can be reviewed at the executive level.
CHALLENGE 2 | Transaction Volume & Assignments/Crediting
In addition to the operational systems concerns in banks, the internal transaction processing methods are not built for incentive compensation administration. High transaction volumes and complex assignments/crediting are required to account for millions of pieces of customer information.
Examples of this include:
- Personal and business investments
- Corporate credit card usage
- Interest on loands and mortgages
These are a few of a multitude of transactional data sources that cause challenges because of the need for data checking, accurate assignments, and approvals that ensure the payment information is correct. These processes become unmanageable if done manually for organizations of 50 or more payees. Most banks typically have hundreds, if not thousands, of payees on incentive programs with payouts routinely over $500MM annually. All stakeholders, payees, managers, administrators, executives, regulators, and the public rely on the integrity of how banks process this transactional data and incentive payouts.
 ICM Technology Alignment & Considerations:
Banks expend an inordinate amount of resources on tracking and assignments that could be better utilized in other functions. ICM solutions add value in these situations through timely, rapid, and accurate transaction processing that include:
• Exception and error handling
• The ability to efficiently manage shared assignments (splits)
• The effective management of a large multitude of products with differing commission rates
Integration of the ICM system with other operational systems or direct importing of transactional data at the end of performance periods limits manual processes, reduces the potential for input or spreadsheet errors, and transforms weeks of data aggregation into real-time transaction processing for calculation and payout.
When focusing on transaction volume and assignment complexity, some ICM solutions are much more adept than others. During a vendor evaluation period, it is critical to confirm references with other customers of similar volume size and assignment complexity. Within the context of a product demonstration, firms should request to see how assignments would be set up and managed in complex scenarios. This will provide important context as to how difficult the solution will be to maintain on a go-forward basis.
CHALLENGE 3 | Tracking Assignments/Credits & Referrals
A big part of the client acquisition process is referrals. Referrals occur when someone with a high net worth comes into a branch looking for services. Upon assessing their financial position, a branch advisor will refer them to a specialist. It is essential that larger opportunities get referred to advisors in the specialty departments (e.g. wealth management, mortgages, commercial) with specific expertise and experience in those markets. To initiate and reinforce this behavior, the referral becomes an important performance component for the branch advisor, so part of their compensation can be a fee paid for each referral.
 ICM Technology Alignment & Considerations:
The ICM system adds value to these referral situations by tracking and assigning who made the referral, when, and the outcome. Usually, if the deal closes, it also incorporates an automated process for recognizing approvals, paying the referrals within the system, and managing how and when it gets paid out.
CHALLENGE 4 | Higher Standards for Regulatory Compliance
In an ideal world, the banking environment would be simple and eligible participants would all be on the same plan, with simple assignments and calculations. However, this is not the world we are living in.
The banking industry has become a competitive landscape where:
- Sustainable and ongoing revenue growth and profitability are the primary mandates.
- Expectations are to satisfy shareholders and employees.
- Banks must remain compliant within an ever-changing regulatory environment, requiring systems with flexibility and the capability to respond, rather than react to change.
- Incentive plans must be specific to each role, with measures that may be different relative to the markets, types of customers, product margins, and channels that the roles are servicing.
- Plans must be accessible and easy to update, modify, and implement.
- Metrics can be tracked and assessed relative to participant performance.
- Audit capability is required after processing to confirm that the proper calculation and payout were consistent with the role and plan design.
 ICM Technology Alignment & Considerations:
ICM solutions meet the governance requirements for banking incentive compensation for eligibility, design, approval, implementation and monitoring. Regulators have created a more restrictive incentive environment today that dictates compliance reporting requirements that can only be met with an effective ICM system in place. With a focus on compliance and auditing capabilities, firms evaluating ICM solutions will be able to distinguish between solutions, identifying the ones that more closely meet their needs.
CHALLENGE 5 | Deploying Incentive Compensation Plans
Above all else, the incentive compensation plan is a communications tool. It tells plan participants what the bank values and wants to pay them for delivering, as well as where to spend their time and effort. Banks are not alone in their failure to adequately communicate to their participants more than the plan mechanics. Most organizations underachieve in this aspect of program management. All the time and effort spent developing the plan is negated if the plan is not understood by the people whose behavior it is intended to influence. It is also imperative that participants have access to their plan document so that when they are uncertain about how a payout will be processed and what they will earn on a particular activity, they have a resource to address their question or concern.
 ICM Technology Alignment & Considerations:
Solutions can provide payees with access to plan design documentation that can be distributed through an automated workflow process to ensure sign-off of plans by participants and management. Along with plan documentation, many systems offer what-if scenario capabilities to show potential for increased earnings based on eligible opportunities in their pipeline.
SUMMARY
This report is intended to provide some insight into the incentive compensation challenges facing the financial services industry. It demonstrates the ability inherent in ICM systems that enables organizations to design, manage, administer, report, and oversee the incentive compensation program so that it delivers superior results, demonstrates uncompromising integrity, and supports development of a reputable culture.
Incentive compensation is a journey. Future challenges in incentive compensation for financial services firms may include supporting qualitative measures of individual and team performance, like customer experience and engagement, and generational differences and expectations that will necessitate different types of compensation plans. Finally, changes to processes and technology, including online purchasing and the proliferation of buying channels, will continue to impact how we utilize ICM.
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CONSIDERATIONS WHEN REPLACING YOUR SPM TECHNOLOGY SOLUTION
Understanding the challenges companies face when migrating Sales Performance Management (SPM) technology solutions can be a significant undertaking. This paper is designed to provide high-level guidance to stakeholders who carry this responsibility. As OpenSymmetry has helped many companies evaluate and effectively migrate to new technology solutions, we are sharing seven key areas that we find critical to completing this kind of effort.
1. CURRENT STATE ASSESSMENT & FUTURE STATE PLANNING
A critical initial step before migrating to a new SPM solution is understanding how well your current program is performing across people, processes, and technology. From there you can devise a future state vision for how your SPM program should operate. By understanding both current state gaps and what your future state needs look like, you can effectively begin defining requirements while also clearly articulating success criteria. It’s important to recognize that your previous or initial SPM implementation may not have gathered all necessary processes/requirements, so it’s vital to take a fresh, holistic view in this first step.
2. DATA INTEGRATION
One of the most complex and time-consuming requirements is determining how to best leverage current source data feeds to support the new platform. Within the context of your current state assessment and future state planning, the team should review what their reporting, analytics, and any future state compensation elements needs are to ensure a meaningful inventory of data requirements are defined. SPM solutions vary in terms of how data is gathered, translated, and uploaded into the system. Some solution applications may have a standardized format requiring additional configuration, whereas others may have the ability of data field mapping, which provides additional flexibility. The ability to own the data translation from your source systems to the SPM platform is key. Another focus point is to ensure that you evaluate all manual feeds to incorporate automation, as well as any additional error validation processes.
3. HISTORICAL DATA
Migrating historical data is an often-overlooked requirement when moving from one SPM platform to another. To keep costs down and minimize complexity, clients may want to ID only the data that is needed to ensure ongoing management of comp (e.g. payment history) and then transfer detail-level data into data storage to be referenced at a future date. It is important to consider what historical data is needed for the new system for reference on future payments
4. PROCESS IMPROVEMENT
Each SPM solution may require users to interact with the system in different ways. This area may need additional attention, especially as it has the potential to improve processes currently employed to manage sales compensation. Understanding the impact a new system will have on current processes, as well as those who manage the processes, is critical to ensuring a successful launch and ongoing management of core processes. As an example, two of the leading solutions in the market have very different expectations regarding the skills users need to possess to effectively maintain compensation plans and reports and, in some cases, execute the day-to-day activities. Defining expectations of your staff related to the new technology, prior to the project, will ideally give your organization the necessary time to introduce training that ensures effective ongoing management of the program.
5. WORKFLOW
SPM solutions vary widely in their ability to support automated workflow. As a result, there are significant challenges for sales compensation teams related to an SPM migration. Capabilities can range from templates to existing documentation, levels of routing, and even implementation of a stopgap for a payee to accept plan documentation prior to payout. Within the context of your future state definition, capturing and defining areas where automated workflows can be leveraged is a necessary part of the core requirements. Before a new system is deployed, it is important to map these processes out to drive user adoption, leverage the SPM system as an auditable repository, and minimize email management.
6. REPORTING & ANALYTICS
It is critical to develop a holistic vision of information distribution to the various stakeholders and tools used to deliver this content (i.e. static pages vs. dashboards). Similar to workflows, different vendors have various capabilities related to reporting for the end users. Assessing these capabilities against your business requirements is imperative to the success of the roll-out. For example, some vendors require more robust configurations in the system (e.g. crediting logic) to enable specific analytics capabilities, while some solutions, architected specifically for reporting and analytics, have much more robust capabilities. Another area for consideration is the use of the vendor’s reporting solution against your in-house technology stack. Some solutions make it easy to port data into new environments, which could be a consideration in helping to keep the number of reporting tools requiring management to a minimum.
7. DEPLOYMENT
The implementation of a new solution should be designed to minimize the impact on payees and managers. One of the most critical aspects of your effort is assessing how all stakeholders will be impacted and how to mitigate any disruption. It is important to identify upcoming changes for your sales organization, administrators, and other internal partners with a plan in place to offer the steps needed to ensure the best chances for solution adoption.
The first step when considering a new SPM platform is an assessment of your current program and the development of a future state vision. OpenSymmetry offers a no-cost workshop to help you gain an understanding of how your current SPM program performs against your needs and industry best practices, as well as a readout on current solutions in the market.
Leveraging the OpenSymmetry assessment methodology and knowledge of the leading SPM providers, you will be equipped with:
• A current state analysis scorecard
• The framework for a business case to support change
• Contemporary intel on the SPM market and SPM vendor capabilities
• High-level deployment and license cost estimates