Many companies credit and pay sales people only after the cash is collected. When this is the case, the main reasons are:
- The sales job isn’t really done until the cash is collected – this is true when collection is often the responsibility of the sales person
- The company is earlier stage with limited cash reserves and needs the cash in the bank in order to pay the sale people
- Sales people are selling contracts for a rate ($/hour, $/square foot) rather than a fixed price contract, so the real value is not known until the product or service is used and billed.
Others who credit and pay sooner, for example when an order is booked, do so because acquiring new business is the primary sales accountability, and there are others in place to deliver and collect, and the situations listed above are not top priorities for these businesses as compared to focusing their sales talent on new business acquisition.
And sometimes it becomes necessary to move from paying at booking to paying when cash is collected. In this case, the business may have to eventually deal with the problem that the lag created by the new sales crediting policy will mean a permanent loss of income for the sales people. This might be recouped at the very end of their employment IF they continue to be paid them after they have terminated for deals sold while they were employed. But many companies would not plan to continue the payments after termination. And either way, that’s a potentially long time from now.
Some companies making such a transition will offer a bridge payment to cover the transition; others may expect the sales person to absorb the loss; and of courser there’s the third option of sharing it. If we look at it purely from the company’s point of view, the current year cash outlay to offer the bridge (maybe 80% of expected commissions for the average lag time between booking and cash, paid out during the transition months) would not add any cost vs. the expected cost of the old (pay at bookings) plan. And if the comp plan doesn’t pay after people leave, then it all comes out even in the end, roughly. That’s probably the humane approach, and most likely to keep the sales people focused and productive during this transition (which they will not like, however you do it). If a bridge payment is offered, it is reasonable to expect some level of performance in order for it to be paid, either in the form of acceptable progress towards quota attainment or specific objectives intended to improve the collection performance of the organization.
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.