First, there are two different “trigger points” in common use in sales compensation plans: sales crediting and payment. The sales crediting trigger is the moment at which a sales person receives credit against their goal or quota, which may allow them to move to a higher payment tier. The payment trigger is the moment at which the compensation for the sales event becomes payable to the sales person (though payment will not be delivered until the next processing period, typically at month- or quarter-end). And, to be complete, there may also be an earnings trigger – the payment can actually be an advance against future earnings.
For example, in large ticket software sales a comp plan may stipulate that:
Credit trigger: Sales credit is given when the order is booked (deal is signed), relieving quota and moving the sales person up in the tiers towards a higher payout rate
Payment trigger: 50% of the compensation value of the deal is paid following signing, and 50% is paid following payment of the first invoice
Earnings trigger: Compensation is earned only when cash is collected and all payments in advance of this are draws against these future earnings (which gives the company certain rights to reverse payment/sales credit in case of cancellation or non-payment by the customer)
For the purposes of this discussion, we’ll assume that the most typical arrangement is in place regarding the three triggers above, which is that sales credit and payment are triggered together at the same time, and that earnings are always triggered at cash collection to allow for charge-backs as needed.
The four most usual crediting and payment triggers are:
Order intake (/booking)
Sales job: Obtain new customer acquisition, new business
Typical in: Larger companies with dedicated new business roles, stable processes, robust deal review; long term contract sales
Product shipped / service delivered
Sales job: Book orders from new or existing customers that result in delivered value
Typical in: Many businesses – this is the most typical sales credit/payment trigger
Revenue recognized
Sales job: Book orders that result in recognized revenue in the measurement period (e.g., year)
Typical in: Many businesses since it’s the same as the prior category in most cases; for software, revenue recognition rules can make the timing of this a bit tricky, and recognized revenue is a common measure/distinction for services sales and account management roles
Cash received
Sales job: Sell, and ensure fulfillment and collection
Typical in: Earlier stage businesses where funding the commission requires the cash; businesses selling to markets with collection issues; long term contract sales with a preference for up-front payment
The principle is that you should pay the sales person soon after two conditions are met:
- Their job is substantially “done” and you’d like them to move their focus off of the already-closed sale and put most of their energy into new opportunities, and
- You know what the sales is worth, within about 10% (this may mean you can’t fully pay for rate-table sales, like a rate for hourly work with no commitment to a specific number of hours, until a usage rate is established or the invoices are generated).
As in the payment trigger example above, note that it is possible to combine triggers. Usually sales crediting is based on one trigger only. But payment is often split over multiple triggers, with one of these usually being order intake and the second being some later event that is straightforward to detect in the business systems, and that represents the moment when the above two conditions are fully met.
Relevant to this discussion, but a subject worthy of separate treatment is the issue of the “annuity tail” that may grow and attach itself to your comp plans if you pay based on invoice for long-term contracts. For several posts addressing different aspects of this problem, see this link.
Donya Rose, CSCP, is Managing Principal of The Cygnal Group. She is a recognized expert in sales compensation plan design, regularly speaking at conferences and writing published articles. She serves clients from F500 to growth-stage businesses, and advises WorldatWork on sales compensation hot topics and best practices.