Sales Compensation Blog

This payment structure gives me heartburn.   We see it a lot and know plenty of companies do it, but I often wonder if the negatives out weigh the benefits.

The structure I’m talking about is the one where the rep gets credit for a sale at booking but they don’t get paid until the company receives the cash from the customer. Typically, this structure represents a compromise between sales and finance and is intended to minimize risk while still being somewhat motivating.  Sales want the rep to focus on bookings so they say the quota will be retired at bookings and their ability to earn an accelerated rate will happen at that time.  Truthfully, sales also want to be paid at this time.  However, finance says no in an effort to conserve cash and to minimize problems if the customer doesn’t pay.

As far as I can tell, there is no motivational benefit to deferring payment until cash receipt.  (I’d love to hear from you if you know of one.)  However, I often think companies don’t fully understand the unintended negative consequences.  There are many:

• First of all, the message this structure communicates is that the company wants the reps to focus on cash collection as well as new business.  Some would say it communicates that they should only make “good sales” but there are better ways to assess a customer’s worthiness.  It doubles the complexity of administration.  You must track and remember the orders and rates so when the cash comes in you can pay out at the rate that was earned at booking.  The rules for releasing the commission also get complicated if the cash received isn’tthe full amount of the order.  If you don’t pay the full commission, then your system will also need to remember the portion that has been paid out.
• Reports to reps also double in complexity.  Theywill want to see what they have earned but not been paid.
• Most states consider “credit” to be “earned” so you may be obligated to pay if the employee leaves even if the cash hasn’t been received.
• You must carry the commissions-earned-but-not-paid amount as a liability on your balance sheet because of the previous comment.
• If the time lag between booking and cash receipt is greater than 3 months, not only can the liability get very big, but the rep will also be de-motivated.
• If the time lag spans years, you can end up paying for non-performance (See blog entry on this).  Your rep can actually stop selling while looking for a new job and still be receiving their commissions earned long before.  You can lose months of bookings.

So what do we recommend?  Here are two choices:

1. Most Motivating.  If your customers generally pay and you have the cash, we believe you should pay at the“point of influence” which usually is bookings.  Have an airtight recovery policy so you can reclaim commissions in the event the customer defaults.  This approach is most motivating.
2. Best Compromise. If you really can’t afford the cash flow hit or you have a high risk of not collecting, then have two payments, one at booking and one at cash receipt.  Like option number 1, you will also need an airtight recovery policy for the booking.  How you split the payments should be based on the average length of time between your booking and receipt.  If the time is under 3 months, weight the split higher for the booking.  If it is longer, the weighting should be higher for the cash receipt. 
   

To implement this, we would recommend that you track two measures:  bookings and cash receipts.  Both would receive 100% credit at the time of the event.  Reward the bookings event at a much lower rate to reflect your desired weighting.  Reward the cash receipt at a higherweight. 
Benefits:

• You improve the motivation by rewarding at booking while still conserving cash.
• It is much easier for the rep (and the administrator) to track both their bookings and receipts and have a good sense of how they are performing for both. 
• You lower your cost exposure.
• You eliminate the liability because the cash there is no lag between the earnings and the payments.