Are You Paying Sales Commissions at the Right Time?
A recent video blog stresses the importance of developing a commission payment plan that best suits your type of company. Taking that a step further, the timing of commission payments is also crucial and relies heavily on accuracy and sales team projects/goals. Sales force motivation and cash flow are also directly affected by commission payment schedules. While there is no perfect method, there is, however, a method that best suits your company’s needs:
- Receipt of Payment
- Project Milestone Completion
Receipt of Customer Payment:
Commissions are paid from money in hand (good for cashflow.) It also motivates salespeople to help collect outstanding amounts.
This isn’t as good of a sales motivator as paying earlier. If you’re computing commission manually, paying on receipt of full payment can be time-consuming. Certain software can shorten times and paying commissions on partial payments also help to simplify.
Variation: Partial Payments
Although commission is usually paid when an invoice is fully paid off, some pay pro rata on receipt of partial payment. The main reason to pay on partial is that, with some accounting software, it is easier to compute. Also, it decrease wait time for sales teams. However, if your commission rates depend on the product or service sold, paying on partial payment is very imprecise, since there’s no way to know to which invoice lines a payment applies. Also, when most of an invoice has been paid, paying on partial doesn’t motivate salespeople to resolve a dispute which may be delaying final payment. Returns can also be hard to account for when the original item was partially commissioned.
Paying commissions upon customer payment is the most common method.
Since salespeople are paid sooner than if they must wait for collections, this motivates well. It’s easy to compute.
Because sales teams are receiving commissions before payment is actually received from the customer, businesses might end up paying commissions on payments not received. Also, salespeople have no incentive to help collect receivables. This can be tough on cash flow.
Second most common method.
Salespeople don’t have to wait until the end of a long project to get paid. It encourages them to keep the customer happy throughout the term of service. Salespersons that leave during the course of a project aren’t paid for work done after they leave. It also doesn’t strain cash flow as commission payments are incremental.
This can be difficult to compute accurately because project tracking software is often separate from the software which computes commission.
This works best if you sell either long projects, such as construction, or services which will be delivered over time, like support contracts or repeating magazine advertisements.
Rewarding salespeople immediately after they make the sale is the most powerful motivator because it provides immediate positive feedback.
Since you pay commission before you get paid, this can be tough on cash flow. Also, it can be hard to recoup the commission if the order is cancelled or changed – perhaps impossible if the salesperson has left the company or the commission was paid to an independent rep. Because most accounting systems don’t keep an audit trail of order changes and cancellations, it can be hard avoid errors when orders are changed.
Commission payment schedules, like other parts of a commission plan, come in many flavors. Your choice will depend on your objectives.
Principal, Flaum Technologies Inc.
Practical commission software for “impossible” plans.