A couple of years ago, as Network Appliance Inc. grew by leaps and bounds, its payroll department was finding it increasingly difficult to calculate the commissions it owed salespeople under the company’s many different incentive programs.

Its solution? The Sunnyvale, Calif.-based vendor of network storage systems installed Callidus Software Inc.’s incentive compensation management (ICM) system, which takes sales information from the company’s data warehouse, calculates how much each salesperson and sales manager is owed and feeds its results to the payroll department. The system generates reports for sales managers and its data is accessible to everyone involved.

Ric McCormick, Network Appliance’s senior director of business applications, says the payroll department can now generate commission checks by the end of the second month of the new fiscal year, up to two months sooner than it could using spreadsheets under the old system. “What it allowed us to do is handle the processing load much faster,” McCormick says. And while the company’s sales force grew by about 70% over the last two years, the sales payroll is still handled by just two people, he notes.

Systems for tracking the commissions and bonuses owed to salespeople are one of the fastest growing types of software. Joe Galvin, research director for CRM strategies at Gartner Inc., predicts sales of ICM system licenses will total $1 billion to $1.5 billion in 2005, up from $75 million to $100 million in 2002. And he isn’t even the most optimistic: Monica Barron, a senior analyst at AMR Research, expects sales of ICM systems to total $2 billion by 2005.

“These applications address what tends to be a very painful process for any company with more than a couple of hundred salespeople,” says Barron. “It’s getting to the point where if you don’t have these applications, it’s a competitive disadvantage in modeling very effective and very targeted sales compensation plans.”

Analysts say the systems save money by eliminating overpayments, which Gartner estimates run from 3% to 8% of total incentive compensation, and freeing up manpower. Barron says users “have been achieving 100% [return on investment] in as little as six months, sometimes a year.”

ICM systems let salespeople know where they stand so they can focus on selling rather than on tracking their earnings. And the trend toward broad-based employee incentive programs suggests an even bigger market for ICM systems down the road, analysts say.

ICM systems are sold by companies that specialize in them and by the vendors of ERP and customer relationship management (CRM) systems. (See table.)

The specialists “offer superior functionality and domain expertise,” Galvin says. “The enterprise vendors have good technology, but they’re winning deals as part of broader ERP or CRM decisions.”