We forgot to pay $200k in commissions (and how to make sure it doesn’t happen to you)
The VP of Sales never got paid her commissions. This was a six-figure mistake and no one noticed for a full calendar year - including the VP of Sales herself. It’s a strange story (how much does this person make to not notice such a huge chunk of change missing?), but the reason why this happened is not so strange.
What went wrong?
To help explain the disaster with the unpaid VP, I should first tell you how I came to work for this global SaaS enterprise. The Sales Comp Manager had resigned, and I was asked to fly in to spend the last few days of his term huddled in a conference room, documenting all of the existing sales comp processes. It was a whirlwind tour with just enough time to cover the most essential business requirements before I was left on my own to figure out how to actually process commissions. I contacted HR to ask for a report. “Can I get a list of all plan participants, including their base and target incentive information?” I was troubled to find that no such report existed. Instead, I was met with the following response: “We have the base salaries from payroll, but we don’t have a way to log incentive comp. The comp manager owned that, and she’s gone.” When asked why they couldn’t have housed the information in their existing payroll software, they replied, “There’s no field for that in our system, so we are unable to capture that information.”
The real issue was that sales comp information existed in multiple departments and no one wanted to take ownership of all of it. I see this all the time with my clients: a lack of clarity amongst sales ops, HR, and finance about who owns compensation data and processes. The result is finger pointing, escalations and payments being missed. Yes, even the VP of Sales can be overlooked in such a state of chaos.
The Quick Fix: Manual Calculations
The desperate solution? I had to bother every sales manager to compile offer letters and plan documents for all current plan participants to serve as the control for that first payroll. The inconsistencies in pay structures themselves were complicated – some participants were paid commissions quarterly, others monthly, and still others annually. Without an HR report in place or a single source of truth for compensation data, commissions become a mystery that could give Sherlock Holmes a run for his money.
The Real Fix: A Single Source of Truth
After the chaos, the right people received the right pay, and fires were put out. However, the commission and compensation processes ultimately needed to be restructured. Here are the best practices that we implemented over the rest of the year:
- Document all owners for the compensation processes. This documentation should include a flow chart that details timelines and dependencies for all commissioned employees. It is crucial that commission process owners themselves are not on commission plans, but that they are on fixed plans that allow them to focus on accurate documentation of others’ compensation plans.
- Have a single system of record for base salary and variable pay. Ideally, commission plan participants will be flagged in this system to enable discreet reporting so that all pay plans can be accessed by those who own compensation, whether HR, sales ops, or finance.
- Create an automated report that captures all new hires, terms, and transfers on the plan. The best practice here is to run this type of report at least weekly and address all updates in real time to avoid adjustments. Along with this, it is necessary to run a periodic to-date report for auditing purposes when preparing an accrual or payroll.
- Add key controls to your commission process. These controls should be part of an executive review of the payroll and keep track of:
- The numeric count of payees, which should match the total list of plan participants on your monthly control report
- Proration logic applicable for any new hires and term employees
- Auditing participants with zero earnings to confirm that no sales were achieved during the measurement period
In order to build a functional, secure compensation process that doesn’t allow commission payments to fall off the radar, ownership of employee pay should be clearly defined and delineated. Without this, consequences could include loss of trust and productivity from payees (read: What is Shadow Accounting?), heavy penalties from auditors, and potential chaos when a key player from the compensation team leaves.
Making changes to your compensation processes or incentive compensation management system? Check back for the top ten tips for commissions processing, and subscribe to the OS blog to have it delivered straight to your inbox!