After you have your company goals, definable actions, and an essential pay mix set up, it's time to determine when you will provide sales compensation to your reps.
What to Consider
As you determine how and when to pay your reps, think about what your organization and the team struggles with -- sales rep motivation, cash flow, or your commission software -- in addition to the type of service/product you're selling -- if it's an immediate sale or a long-term service -- to find the right payment plan for the outcomes you want.
Consider the following when you're deciding when to provide the compensation to your sales reps:
- Cash flow and budget
- Amount of sales reps and size of the company
- Compensation plans your competitors use
- Organization's goals and objectives
- Payroll, ERP and accounting software
- Product or Service/subscription-based payments
As you can see, there are a lot of different elements impacting the best commission payment times, so we've broken it down even more below. Keep reading for the pros and cons of each compensation payout method:
1. At the time of booking.
Pros: rewarding your sales reps right after they make a sale is the most powerful motivator because it provides immediate positive reinforcement for their behaviour. This is the point of providing a sales commission in the first place -- to reinforce their current actions and encourage them to continue.
By showing the immediate impact of their work, this is ideal for boosting motivation and morale because they see the monetary impact of closing the deal. This is also the easiest method of compensation to calculate and keep track of, regardless of commission and accounting software. However, computing this type of commission causes technical problems -- most audit and ERP systems don't manage cancellations, and this might result in over/underpayment of reps.
Paying on bookings is a good idea if your company has long projects, service contracts, or software on a subscription basis. However, if your company struggles with cash flow, this might not work and cause more harm than good. This time of payment is best for early start-ups and driving short-term growth.
2. At the time of invoicing by the customer.
This is the second earliest time to pay and the second-best motivator. Paying your reps compensation is also the easiest method to use if you don't compute commissions with any software or automation.
However, you may pay more commission on more sales than you get paid for, and your reps no longer have the incentive to collect receivables. This payment method is also tough on cash flow and ineffective for seasonal products.
3. At the time of the first payment by the customer.
This payment method is best for companies with limited cash flow because you pay out of what you've received.
But if you're shorted due to disputes, salespeople will be less motivated to resolve these because they're already received part/a majority of their commission. If you choose this payment method, make sure you have a clawback policy implemented in the event of customer churn. This can disrupt your cash flow if you are a subscription or service company because you're not receiving full payment.
It's important to know that not all commission software supports this method of computation. When finding a sales commission software, make sure it's not going to make your life harder. The point of sales commission software is to integrate into what you have now, not make you change all of your systems and procedures to fit it.
4. At the time of full payment by the customer.
This payment method is excellent for cash flow because you pay from the money you already have on hand. This also motivates salespeople to collect outstanding amounts from customers and reinforces that they're not just working on getting a sale, they're working to obtain payment, too.
Paying at the time of full payment ensures reps focus on businesses that benefit from the product and service, and works well for subscription companies who want to keep customer retention rates high. Providing compensation at the time of payment keeps commission payments closer to actual revenue recognition, and puts the focus on the sale retention.
Unfortunately, because this payout to your reps can take time, it's not the best plan if you're trying to increase motivation within your sales reps. It's also hard to keep track of if your ERP and sales commissions software aren't integrated. This is the most common time to pay commission and is easy to track with sales commission software.
How to move forward
Now that you've reflected on the following types of compensation, payout structures talk to your peers and figure out what will work best with the commission software you have in place. As the sales team manager, this should be making your day-to-day work more relaxed, not harder.
Consider a plan that integrates with your other business technology landscapes in place, provides data insights and updates in real-time with payments and your accounting software. It should also be easy to enter data and implement changes on your end so that there is less room for error and mispayment.
If you're looking for a better sales performance software than you have now, consider Performio for sales performance, incentive compensation, and data tools to accurately calculate and report sales commissions, no matter how complicated the compensation plan.
Salespeople receive timely, easy-to-read reports and leader-board rankings. Your management team quickly learns what incentives are working and which are not, as well as how salespeople are performing. Miscalculations are mitigated, performance is elevated.
A SaaS-based system, Performio has saved more than 500,000 administrative hours and calculated more than a billion dollars in commissions.