The ROI of incentive compensation management
Forrester and the Total Economic Impact of IBM ICM
For businesses today, return on investment (ROI) is a critical determinant in the selection of the optimal Incentive Compensation Management (ICM) solution. Variable compensation teams are on the hunt for a solution that helps them both support internal efficiencies within their team, while also increasing trust and motivation within their sales teams. To support these efforts, IBM offers its Incentive Compensation Management (ICM) solution, which enables organizations to design and manage complex compensation programs, including sales commissions, bonuses, managed business objectives and noncash rewards. Business users can create, model and administer these pay-for-performance programs.
IBM commissioned Forrester Consulting to conduct a Total Economic Impact (TEI) study to examine the value that companies may realize by deploying the IBM ICM solution. To better understand the benefits, costs and risks associated with an ICM implementation, we spoke with four existing customers about their experiences using ICM. We then aggregated the feedback and created a composite organization and an accompanying financial model to understand the benefits an organization could receive from this investment.
This composite organization represents a US-based company with annual revenues of $2.2 billion. It has 12,000 employees, with a sales staff of 2,000. To make the scenario as realistic as possible, we analyzed our total economic impact financial model during five years for organizations moving management of their variable compensation from legacy systems and spreadsheets to a new IBM ICM deployment.
We found that the composite organization had a risk-adjusted ROI of 204 percent. It had total net present value (NPV) benefits of $8.9 million versus total NPV costs of $2.9 million, resulting in an NPV of $6 million. That amount works out to be $3,008 NPV per user with a payback period of 13 months. Take a quick look at some highlights from the study:
- More than $1.4 million was saved each year because of improved accuracy of payments. Through automating processes and reducing the need for manual processing, the composite organization reduced overpayment errors by 90 percent, resulting in a savings of over $1.4 million each year.
- Over $3 million in benefits was realized from reduction in shadow accounting. Using ICM means that the sales staff now has increased visibility into its sales numbers with access to personalized performance data and variable compensation information. Using ICM, the composite organization saw a 60 percent reduction in shadow accounting, which equals 14,400 hours saved across the organization’s 2,000 salespeople.
- The variable compensation team saw more than $445,000 in savings because of reduced time spent on the payout process and implementation and rollout of variable compensation plans. The composite organization automated and streamlined the processes associated with each payout cycle, including data collection, compensation calculation and commission statement distribution by 60 percent, resulting in over $90,000 of savings each year. In addition to streamlining the payout process, the composite organization also reduced the time spent on implementing and rolling out its variable compensation plans by 75 percent, which saves more than $14,000 each year.
- ICM enabled savings of 96 person hours per audit. The ICM solution automatically creates audit trails of changes and events, which helped reduce the time spent gathering information for an audit event by 80 percent for the composite organization.
- ICM can help increase overall sales.
Benefiting from increased sales and targeted incentives
Our interviews uncovered that, in addition to the benefits already mentioned, organizations may also benefit from increased sales. We heard about potential benefits such as increased sales from improved visibility into the compensation plans and results, with salespeople trusting their data more and spending more time selling, thus increasing their sales. We also heard about increases in sales from improved coaching with marginal performers, in which managers have better insight into where they are struggling and are able to better support and coach these sales associates.
We also discussed how organizations can increase sales from quickly implementing targeted incentives and drive a certain behavior or certain product within their sales teams. Finally, we also heard about how ICM helps to reduce sales turnovers, which minimizes the risk of unmet sales opportunities. With ICM, sales employees understand their compensation models, are more satisfied and are less likely to leave the organization. By implementing a solution that reduces frustration around the compensation model, an organization can reduce the sales rep turnover rates.
Forrester and IBM suggest that you use your own estimates within the framework we built out in the full study to determine the ROI you could expect from this technology investment.