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.

Next Steps

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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Comments

Hi Jeremy,

Thanks for reaching out to us - here’s a quick answer to some of your questions, though a longer discussion would be more comprehensive:

1. Who gets credit for the order; sales team at the time of booking or at the date of invoicing?
Historically, many companies associate the crediting and payout events together for simplicity of processing; however, I have seen instances where the sales team gets credit for the sell immediately at booking showing they have “earned” the commission versus being paid. In those scenarios, they would typically have two separate columns on their compensation statements showing both earned for the month and paid for the month given them visibility. That scenario becomes more challenging to show that way if not on just a straight commission type payment per transaction as there could be other tiers or thresholds from an attainment perspective that could drive higher payouts by the time the pay event has been reached. Finally, I have experienced instances where companies 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.

2. If there are business challenges with inventory or resources internally, do you give the rep the benefit of revenue early or do you provide an advance on potential earnings if they are in a financial hardship?
If all of the payout is held until some further triggering event such as being paid on the invoicing event that typically has some significant lag behind the booking event, companies will normally provide some kind of advance or recoverable draw based on a percentage of his on target earnings (OTE) that is then netted against those future earnings making the company whole. This allows the rep to receive a standard monthly draw as a % of OTE while not having the company feel like they are just fronting the money given the future payout is reduced by the amount of draw already received for that period of time.

3. If you provide advances on possible revenue, what should a Company provide to an associate during these times? An organization does not want to become a bank but what is the right % to provide overall to an associate via a loan?
Most companies we interact with aim for a draw amount around 20 - 35%, but I have seen some organizations go as high at 40 - 50% in extreme cases. As you stated, the company is not there to be a bank just blindly giving out free money to the sales reps. The terms around a Recoverable Draw, versus a Guarantee, will leave them the ability of netting back to actual earnings with some kind of repayment in certain cases if the rep consistently falls below the draw total. The % of the draw can also be impacted by the pay mix of their OTE depending on how much is base versus how much is variable.

Interest article and business challenge. I work for an organization right now that recognizes revenue entirely at the time of booking, considers incentives paid as an advance and becomes earned on the date of invoice. If an order does not invoice within 60 days from booking, the revenue and associated advances get clawed back until the order invoices. We, however, do see the disconnect financially where we are paying associates on business that the company has yet to recognize the revenue which can have a disconnect of several months. Particularly in situations over fiscal years, the accounting for the sales expense gets very tricky.

We are looking to move to recognition at the time of invoicing to simplify the sales crediting, systems processing and put sales associates at easy to know in many cases when they are paid incentives, they are for the most part earned. The questions I would pose out to the Sales Compensation community are when moving to this model;

- Who gets credit for the order; sales team at the time of booking or at the date of invoicing?
- If there are business challenges with inventory or resources internally, do you give the rep the benefit of revenue early or do you provide an advance on potential earnings if they are in a financial hardship?
- If you provide advances on possible revenue, what should a Company provide to an associate during these times? An organization does not want to become a bank but what is the right % to provide overall to an associate via a loan?

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