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Managing Complex Sales Compensation Plans

Robert A. Bonelli, President and Chief Operating Officer, Northeast Securities, Inc.

As companies grow and the profiles of their sales forces change accordingly, so must sales compensation be reinvented to support that growth. Northeast Securities, which during recent years has evolved from a single retail brokerage office into a highly diversified, full-service brokerage firm, is no exception. Implementing specialized automation software has been key to managing our sales comp process during this period of rapid expansion.

Our company was founded in 1989 by chairman Steve Perrone. From 1989 to 2001, Northeast operated with twenty-seven employees and topped out at $17 million in revenues. Five years ago, I began working with Steve and others at Northeast to explore opportunities for the company’s future. Together, we designed an initial plan of restructure and growth. That’s where our real story begins.

Seizing opportunities created by what was an accelerating decline in the brokerage industry, we began diversifying by identifying key financial services players and leveraging their areas of expertise to expand our scope of offerings. The objective was to convert the firm into a full-service brokerage company serving institutional and retail clients alike with both independent and employee (in-house) brokers.

From 2001 through 2005, the company did just that and grew to include business units focusing on municipal finance, registered investment advisors, independent brokers, investment banking, piggyback broker dealers, research, a private client group, and an institutional desk. As of last year, we operated five offices in the United States, net $53 million in revenues, and employed 130 people, most of whom we call “producers” – our sales force. All receive production-based compensation, and most receive some combination of fees and commission. But what has all this growth and diversification meant for the management of our sales compensation?

We went from a small, singularly focused office using a fairly basic compensation model to a much larger, highly diverse, and far-flung sales force representing myriad compensation models across multiple product lines. Obtaining data from our clearing firm, putting the data into Excel spreadsheets, and manually calculating payouts was no longer an option. While an automated commission management system can help businesses at any level, it became an absolute necessity for our increasingly diverse sales force and complex compensation formulas.

Northeast turned to Xtiva Financial Systems (whose CEO, William Lieberman, also is featured in this Collection) early on for technology that could help us meet the challenges of managing a growing number of compensation variables as we continued to expand. For Northeast, the system has four major application areas: 1) accounting; 2) as a tool for management; 3) as a tool for reps; and 4) for housing and maintaining data. Three of the company’s revenue streams rely on these applications: in-house reps, independent contractors, and piggyback broker dealers.

Simplified Accounting

As our sales force continued to grow, so did the number of variables making up the compensation equation. For any given transaction, there are a number of factors that impact the calculation of payouts, including the rep and what he/she is paid, the product type, how the deal is executed, the cost per ticket, the client, and so on. Then, there are commission reversals that have to be accounted for each day, as well as other monthly fees to be deducted for health insurance, terminal fees, etc., which Northeast pays on behalf of the rep. Using software to automate these functions has kept the accounting processes from becoming prohibitively labor intensive.

Management Snapshots

From a management standpoint, keeping up with the details of so many producers’ activities becomes an equally challenging and tedious task. Using the software, on any given day Northeast’s management can see where the company stands in relation to revenues, payouts, and what its brokers are doing. A host of reports is available, including those that look at overall compliance with our industry’s 5 percent regulatory guidelines; what we were charged from the clearing firm versus what we paid in commissions; deal profitability (what the dollar amount traded was relative to the charges and amount of commission to be paid out); details of trades for each branch; and various production analyses. And it lets us identify and troubleshoot errors or problems early on that otherwise might not be discovered until the end of the month.

Keeping Reps Informed

The software also gives our reps a monthly view of what they’ve done, as well as allowing them to see daily activity related to trades for particular clients, commissions generated, and what they should be paid on those commissions. Reps can look further back at production details on a six- and twelve-month basis, too. This capability eliminates a lot of related accounting work, which we previously had to generate by hand. In fact, for every two-hundred statements we used to send out, we’d get almost as many calls from reps with questions about payment amounts, fees charged, corrections, etc. With the software, it’s all spelled out in detail for our reps.

Streamlining IT

Initially, Northeast maintained a database and housed its own data with additional external support. As the company grew, so did the need for a more sophisticated database and warehousing capabilities. Eventually, we were able to outsource our IT and eliminate in-house resources, which in turn proved to be more cost-effective and increased the service we were able to provide to our rep field force. The reps could easily get the information they needed without having to wait for our back-office personnel or IT staff to respond. Now, Northeast needs only Internet access to connect to the database and tap into the various software capabilities.

Whether it's running a financial services company or virtually any business with a growing sales force, the ability to easily manage and communicate the details of a sales compensation plan is a valuable tool that makes increasing sense. For Northeast, automation has become a critical means for keeping up with the complexities of our sales functions. As we continue to grow and diversify, we will look for new technologies to gain even greater efficiency and sophistication in our ability to manage the sales compensation process.

© 2006 Ewing Marion Kauffman Foundation. All rights reserved.

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