Ten Tips to Take the Dread out of Commission Accruals
For better or worse, accrual processing is a lot like the movie Groundhog Day. In the film, Bill Murray plays the part of Phil, a weatherman who is stuck living the same day over and over. At first, he dreaded the day and felt stuck in a nightmarish loop but ultimately embraces his circumstances and makes the most of them. He asked himself what could be learned and sought to better himself with each repetition. In the world of commission processing, we manage our work lives around the same monthly and quarterly deliverables again and again, and we too get to choose whether or not we want to master those circumstances. Here are ten tips that I developed over the many years of living my Groundhog Day of commission processing:
Be proactive. Since accruals must be compiled in a very tight window, it’s important to prioritize time sensitive activities such as loading final revenue or point of sale data. HR status changes and other similar data adjustments should be addressed in real time, prior to the accrual, whenever possible.
Factor in revenue recognition. Held and released revenue can have a significant impact on commissions. Be sure that your accrual includes sales that have been released from prior periods and excludes those sales that will be deferred to a future date. (More on ASC 606 and commissions.)
Shake the trees. Remind your business partners about the impending accrual and ask if they are aware of any exceptional payments, splits, adjustments or other considerations that might impact the forecast.
Scrutinize the top and bottom. Review the top and bottom earners. For top earners, check their large deals to be sure they should not be split or deferred. Run some simple manual calculations, such as multiplying total revenue by commission rate, just to be sure the commission seems reasonable. Confirm results of bottom earners by reviewing payees with zero earnings or a liability.
Skip the impossible stuff. Some tasks simply cannot be accomplished in the time line provided. Either the data doesn’t exist or the task is too big, such as point-of-sale data. Chances are that your distribution partner is unable to provide it to you before your accrual is due, and if you have to manually assign credit to deals, it’s a huge task. Accept that it’s impossible and determine a plan to estimate the point-of-sale data.
Review historical run rates. Maintain a rolling 12-month report that includes data points, such as revenue, commission percentage of revenue, number of participants, and average commission per participant. This report will help you determine an uplift percentage to apply to your forecast and provide appropriate justification for auditors.
Produce a revenue waterfall. Complete a comparison of recognized revenue versus commissionable revenue and account for every variance so you can confirm that revenue has been credited appropriately. For example, the company might have recognized license revenue for which no participants are eligible for payment. That revenue could be identified as “non-commissionable license fees”.
Count your payees. This might sound like common sense, but it’s an easy mistake to make. Be sure that your monthly controls include a comparison of all eligible plan participants to your list of payees. Leaving someone off the list can be a really expensive mistake.
Form a committee. Even if you are the subject matter expert, an accrual should not be a one-man show. Figures and methodology should be reviewed by a committee and should include executives outside of your immediate team. Ideally, those executives will have visibility into sales activity and revenue recognition and can verify that the data aligns with their understanding of the business. If you have a team of commission analysts, they should all be invited to the table and given an opportunity to participate in the discussion. This increased accountability will sharpen their skills and give them more skin in the game.
Document adjustments. Once the accrual is complete, be sure to keep a running list of adjustments. To the extent possible, make a list of every significant change that was made to the data, and quantify the impact. Some examples of adjustments to document include: quota changes, revenue increases, decisions to guarantee a participant, and SPIFs that were not previously disclosed. These notes will form the basis of your commissions review and serve as the talking points for describing any variance. If any variance could have been avoided, be sure to document a control and add it to your monthly process moving forward.
You don’t need to dread commission accruals. Embrace them as your very own Groundhog Day, and master the circumstances. Learn to take a methodical approach, leveraging what is known and learning from your mistakes. This will enable you to work smarter, reduce effort, and improve the margin of error. Once uncertainty is removed from the equation, you will no longer dread the process and may even start to look forward to those monthly commissions reviews.