You asked, we answered: Should I pay reps on booking or cash?
February 15, 2017
As a sales compensation consultant at OpenSymmetry, I have heard countless horror stories, like the scenario above, about payment timing. This client paid its salespeople when deals were booked, rather than when the order was paid out – a highly motivating but highly risky pay structure. With this huge loss, the client understandably wanted to restructure the incentive compensation process so that sales reps only received commission once invoices were paid. However, this could also have unintended consequences on their salesforce’s motivation, time management, morale, retention rate, and more.
Paying Reps on Booking
Striking a balance between risk and reward is not easy. There are several factors at play to determine the best timing for sales force commission payout.
What is sales “booking”? Sales booking is when a customer commits to spend money with your company, e.g. when the deal is “booked”.
When salespeople are paid upon a deal being booked, it leads to immediate inspiration and positive feedback, which encourages repeat effort and eventual sales. Such a policy also allows the sales team to move on to attack subsequent deals more quickly, and allows the entire organization to easily track commissionable events (which might also reduce shadow accounting, if sales can more easily “trust” there won’t be an error in their commission payments).
On the flipside, paying when booked puts more risk on the business, given a deal could fall through, and could lead to potential cash flow issues. Not to mention that all of the positives from a salesperson being paid when a deal was booked could easily come crashing down if in fact a deal does fall through—demoralizing them to a point beyond had they never been paid in the first place.
Paying Reps on Revenue
Looking at the advantages of commission being paid when the order is paid (“on revenue”), it’s a much less risky endeavor for the organization. This removes the possibilities of clawbacks, and resulting in a more stable cash flow.
Of course, all of that comes at a cost, as delayed payment means loss of inspiration. It also leads to a more difficult invoice tracking process, and one that is more time-consuming for all involved, as sales is now putting great effort into chasing unpaid invoices instead of closing another deal.
Here is a visual breakdown of the pros and cons of booking vs. paid payment structures:
Looking at the table above, it’s obvious that paying upon booking is the route that leads to a happier and more motivated sales team. However, the sales compensation structure should prioritize business models and customer relationships. No matter how a plan makes a sales team feel, it’s vital that it makes financial sense for the business.
Paying Reps on Invoicing
Now, there are plenty of exceptions and factors that may mean that commissions are not paid out based on bookings or revenue, but rather at the time of invoicing – potentially a middle step between booking and revenue, where the gap may come from the processing time included when reps hand off accounts to the finance or accounting department. Paying reps on invoicing may be less risky than paying on booking, depending on your business model, but it is not always the case.
Sales Compensation Policy & Timing Factors
Some key factors in determining the timing of sales compensation payout include:
Business model. The companies that usually can take on the booking payment cycle either sell to large, enterprise companies that rarely default on deals, or sell products or services that are immediately paid off. On the other side, companies that commission upon invoice payment tend to have riskier business models.
Customer attrition. If customer attrition is high and pricing models vary widely, paying commission after invoices are paid is advisable. In this circumstance, it doesn’t make sense to pay out right away when it’s likely the customer won’t pay out their full contract. To address this issue, one of my clients has designed a commission structure that pays out 30% of the contract value up front; then the remaining 70% as invoices are paid.
Sales rep turnover and clawback policies. If sales rep attrition is high, it’s hard to justify large upfront commission rates. Sometimes the promise of guaranteed commissions down the road for deals already completed is enough to keep a sales rep on the team. Also, while you can’t claw back commissions from reps who have left the company, it is important to have a policy in place on what to do if a deal falls through. For some, this happens so rarely that commissions are never clawed back.
Can You Credit Reps for Commissions on Booking and Pay Them on Revenue?
The short answer is yes, if it matches your sales team’s culture and makes sense for your business model. A sales rep may get credit for the sell immediately at booking showing they have “earned” the commission, before being paid, either at invoice or when the cash flow comes in. In that scenario, a company would typically have two separate columns on its compensation statements showing both “earned” for the month and paid for the month, giving reps visibility into their commissions earned. A company may go down the middle for some level of compromise and pay 50% of eligible commissions at the time of booking and the other 50% of eligible commission at the time of invoicing or payment.
A balanced approach is ideal for most companies. A recent trend among my clients is a lower commission rate for bookings followed by quarterly or year-end bonuses based on attainment of a revenue or invoice payoff quota.
These decisions vary by company and this blog covers only a few factors to consider. If you are considering a change in the timing of commission payments, be sure to evaluate the decision by quantifying the ROI through performance tracking systems. Pull reports that measure stats such as the time sales spends chasing invoices compared to selling time, sales force attrition, and number of manual adjustments to commission payouts. Compare your stats to industry benchmarks for guidance in determining the best payment timing option for your unique situation.
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