Bookings vs. Revenue: A Sales Compensation Crediting Conundrum

When should a seller receive quota credit and/or incentive pay for their sales efforts? Common options include bookings, shipment, billings, delivery and recognized revenue. For some organizations, this decision is well-defined and does not need to be revisited. Other organizations, though, are contemplating redefining or validating their crediting event as well as determining the right one for a new product/pricing model.

This article provides some perspective on this subject.

Sales Crediting Guidelines

The sales team exists to persuade customers or partners to purchase the organization’s solution(s). Therefore, sales compensation plans exist to pay for that persuasion. The guiding principle is to tie the crediting event as close as possible to the persuasion event while minimizing financial risk for the organization and the seller.

Crediting Event Options to Consider

Many crediting events (see chart below) may be used to meet an organization’s needs.

The most common events are bookings, shipment, delivery, billings and recognized revenue. However, these solutions vary by industry due to different product/pricing models. The rest of this article will discuss the application as well as pros and cons of these primary options.

Bookings (a.k.a. Orders)

A booking event is when the order is accepted by a customer and a company. Bookings work well when there is a predefined solution with a committed contract (no contingencies) and there are no/limited issues recognizing revenue or obtaining payment from that booking.

For many sales teams, the seller’s key responsibility is to get the customer’s signature on an order and then enter it (a.k.a. “book” it) into an order system. The advantage of using a booking crediting event is that it allows an organization to align its sales incentive pay closely to that persuasion event versus delaying the credit/pay to a later event.

If an organization frequently has change orders or canceled orders, it likely will want to use another crediting event or consider a more complicated hybrid solution, as described later.

Shipment

Shipment is when an organization sends a physical product to a customer. Many sellers typically do not control when a product actually ships to a customer, so this event can lead to a misalignment between the seller’s persuasion activities and their sales compensation credit/payment. The degree of misalignment depends on the lag time between a booking and shipment.

Delivery

Delivery is when an organization supplies a solution to a customer (including cases where it comes via access to an online service, downloading a software-as-a-service [SaaS] solution or running a digital advertisement). Delivery can align well with a seller’s persuasion activity and be more aligned than predefined billing schedules.

Billings (a.k.a. Invoices)

A billing event is when an organization sends a bill or invoice to a customer. Common billing times include after a product is delivered, once a service is completed, at regular intervals (like monthly for subscriptions) or at different project stages (for large projects). For some solutions, the billing event aligns well with the seller’s persuasion activity; but for other solutions, it does not.

Recognized Revenue

Recognized revenue is when an organization realizes actual income, specifically according to “generally accepted accounting principles” (GAAP) for U.S. entities and “international financial reporting standards” (IFRS) for those in more than 100 non-U.S. countries. Recognized revenue works well when it clearly aligns with a crediting event, such as shipment or delivery with limited exceptions.

When organizations use various contract clauses that impact how and when revenue is recognized, sellers may find the process complex and frustrating. Sellers are not accountants and do not want to have to understand all the accounting scenarios. This is why it is important to remember that sales compensation crediting events do not have to align with revenue recognition rules if these rules are complex and do not conform to the seller’s persuasion activities.

Hybrid Credit Options

Some organizations desire to use a booking event to align pay with the seller’s persuasion event but have challenges with using bookings only. To fix this, they may opt for a more complex solution that uses multiple crediting events. For example, one organization may provide 50% credit at booking and 50% credit at billings. A simpler option is to create two measures that have their own crediting events.

A Note on “Incentive Earned” and Clawbacks

In the terms and conditions document, organizations should clearly define what “incentive earned” means. A common approach is to define this as having:

• An opportunity entered in the customer relationship management (CRM) system;
• An order with approved pricing;
• The solution delivered/shipped;
• The customer billed; and,
• Payment collected.

The sales compensation plan provides “advanced” pay at the time of a particular crediting event, such as booking, billing or shipment. However, this is subject to a clawback if the solution is never billed, shipped or delivered, or the customer never pays. This approach provides timely credit/pay to the seller while also minimizing financial risk for the business. It also can be used to leverage the seller’s relationship to recover any unpaid bills.

Selecting the Right Crediting Rule

Organizations should consider using the following guidelines when selecting their crediting event. Ensure that the event option:

• Is simple to understand;
• Is tied as closely as possible to the persuasion event;
• Aligns in-year pay with in-year performance (which reduces annuity payments based on persuasion that happened in previous years);
• Minimizes financial risk; and,
• Minimizes clawback situations.

To determine the correct crediting solution, it is important to understand how revenue is recognized for each product/solution, the seller’s influence on various crediting events, the time lag between different events, and any financial or clawback risk. Then, convene the cross-functional design team to determine the right crediting event(s) based on what is needed to provide a high level of motivation for the seller while protecting the organization financially.

Editor’s Note: Additional Content

For more information and resources related to this article, see the pages below, which offer quick access to all WorldatWork content on these topics:

• Employee Recognition
• Organizational Performance
• Sales Compensation