The issue of how to manage split sales compensation payments is a hot topic, particularly in the USA and particularly in the ICT industry.
Split compensation payments occur when a sales compensation plan includes:
- A first payment on the signing of the order/initial invoice
- A second payment event when the order has passed a gate e.g 12 month anniversary or when the contract is fully ramped up to expected usage levels
- Subsequent payment events to capture the full value of the order (with respect to quota/target)
Why are split sales compensation payments used?
The main reason why businesses elect a split sales compensation payment is to manage risk. By splitting the sales compensation payment, the salesperson and the business share the risk.
- The value of the deal can’t be determined until several months post-sale
- There is a volatile usage element to the contract
- An implementation may vary the value of the contract
- The customer cancels so the full value of the deal is not realized
Why are split sales compensation payments a good idea?
Some businesses use split compensation payments to discourage salespeople from making bluebird deals that have a short-term win for the company but a big incentive payment for the salesperson.
In addition, split sales compensation payments:
- Support efficient installation because the salesperson is not fully compensated until it is complete
- Promote customer satisfaction because the salesperson does not receive the full payment if the deal is compromised
- Can reduce the need for claw-backs (when deals change over time)
- Align the compensation cost to the period when revenue is recognized in the profit & loss statement
The pitfalls of split sales compensation payments
In terms of influencing a sales person’s behavior, split sales compensation payments have their limitations:
- Salespeople cannot always influence the lifetime value of a customer. In the ICT industry, the implementation phase of the project is often handed over to the project manager and operations team leaving the sales person with little influence over the rollout. There are often issues identified during the rollout that was not discovered during pre-sales, which can lead to variations to the initial quote and in some cases, the conflict between the vendor and customer. If the salesperson completed the pre-sales process and has little influence during rollout, can be unreasonable to penalize their compensation payment.
- The lag time created by split compensation payments breaks the link between performance (signing the deal) and reward (banking the commission). It makes it more difficult for Sales Directors to motivate their sales teams if the reward seems too distant to be real.
- A split payment process often requires the sales compensation management system to link bookings or opportunities in a customer relationship management system or accounting software. The invoice data, and even more so the accounts payable data, may not contain an adequate level of detail to link back to opportunities or bookings (particularly if bookings data changes frequently). The greater the number of payout events, the more frequently this linking needs to take place and the greater the chance of error and need for manual intervention.
How to mitigate split sales compensation issues
- Reduce the number of separate payout events
- This has the added benefit of making each event more meaningful
- Reduce the number of integrated systems
- Choose systems that can provide the most unambiguous data. For example, is paying on invoicing a reasonable substitute for paying on customer acceptance?
- Estimate the most common outcome and pay on that
- Release payment over time based on the estimate with periodic audits and account balances.
- Pay separately for booking and invoicing
- Separate quotas
- Bonuses on bookings vs. quota, commission on invoiced revenue
- Consider a separate aged accounts receivable measure
- Unlinked to individual orders
When to use split sales compensation payments
It is important to provide the right balance between protecting the house and driving sales behavior.
To get the right balance be clear if the purpose of your sales compensation plan is to:
- Drive Customer Acquisition - split sales compensation generally does not work well if you are on an aggressive customer acquisition strategy. You should lean towards paying most (if not all) sales compensation when the deal is signed to motivate salespeople to repeat the process.
- Customer Retention/Growth Strategies - split sales compensation can work well if your business has Account Managers trying to grow the long-term value of existing accounts, particularly if there is an accelerator for the Account Manager.
How to Determine Split Sales Compensation
According to a survey by the Alexander Group, 35% of companies surveyed give at least 50% sales credit at the time of invoice.
To calculate the upfront component of the split commission payment:
- Review your sales strategy. If you are driving new customer acquisition, weight the split payment in favor of the upfront component.
- Calculate if the upfront payment is covered by cash received from the customer? Does the cash received contains sufficient margin to pay for the upfront commission payment?
- Determine the break-even point for the sale (with respect to paying the commission cost of sale)
- Ask what is the likelihood of the customer leaving within 12 months
Once you have determined the upfront component, you need to determine how you will manage the second payment.
Managing second payment commissions
The problem with a delayed payment is that it can be complicated to administer. Your business will need advanced systems in place to ensure you:
- Track the sale
- Calculate the second payment according to the sales compensation plan rules
- Ensure you make the second commission payment, rather than rely on salespeople to chase it up
How Performio Manages Split Sales Compensation Payments
Performio includes key features to make it easier for Sales Managers, Compensation Administrators and Finance to manage split commission calculations. Instead of manually tracking changes in sales transactions and updating commission payments, Performio automates the process. Three key features that support this are:
1. Reference table management
Reference Table Management allows an administrator to integrate special reference tables. For example, an administrator can set up an “Active Customer Table”. The table can be linked to the sales commission table and any records flagged where the customer is no longer active. Inactive customer records in the sales commission table then trigger a commission adjustment in the current period.
2. Prior period calculation
Performio allows users to run calculations on data from prior periods after they have been locked down (so you can reconcile back to payroll). For example, if the total value of a deal changes due to customer variations, the deal value can be updated. Performio will calculate the final commission payment based on the revised deal value.
3. Transaction data management in prior periods
Transaction Data Management allows users to set certain fields to be editable in prior periods. For example, the “Sales Order Value” field can be edited in prior periods so that a change to the order value can be captured. This change will trigger an adjustment to the part two of the commission payment.
There are additional features that will support unique business rules for split commissions but these three are the most commonly used in split commission payments.
If you have split payments in your sales compensation plan then Performio can manage the rules, data and payments efficiently and effectively. For a demonstration, contact us today.