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WORKSPAN DAILY |

Accounting for Errors in Your New Fiscal Year Sales Compensation Plan

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mediaphotos / iStock

Editor’s Note: Workspan Daily will be publishing a monthly sales compensation column from the Alexander Group for the benefit of our readers and to encourage further discourse on topics vital to compensation professionals. New to WorldatWork? Please feel free to join the discussion in our new online community, Engage, or send your thoughts to workspan@worldatwork.org.

By now you have successfully implemented the new sales compensation plan for this fiscal year.  Congratulations!. But wait. What if there was a mistake, a goof or an overlooked item? Now what? Learn what could go wrong and what to do next.

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You are responsible for annual updates to the sales compensation plan. Like sales compensation designers at other companies, you have updated your incentive plan for this fiscal year. You join the other 85.6% making changes to their incentive plans. Here is what you did:

  • Aligned the new plans with the fiscal year business goals
  • Adjusted performance measures and weights
  • Confirmed market competitiveness, pay mix and upside potential
  • Received stakeholder approval
  • Provided an excellent communication rollout
  • Distributed job specific plan documents with performance commitment worksheets
  • Secured signed acknowledgement of the sellers (required in several states)
  • And, got IT onboard with powerful calculation software to process the sales credits

Nice job, but you discovered something is not right. What could go wrong?

Plenty.

There are dozens of potentially unforeseen errors. Let’s review some of the more common, unexpected vexing issues and how to address them.

Late Quotas

Challenge. Just when you thought the quotas were fully allocated, you discover they are not approved. Most sales compensation plans use quotas to calibrate performance expectations and are often an integral part of the incentive calculation. They have a notorious history of being late. What does this mean? Somewhere in the sales management/sales operations/sales finance ever-world, the quotas allocations remain unapproved, thus stalling the incentive plan calculations. What should you do? 

Solution. If the pay plan is monthly, and quotas are late, you still need to make monthly pre-payments. In this case, since you do not have “quota performance data,” you will need to make a partial monthly payment such as 65% (for example) of the target incentive for the month. When the quotas come online, you will need to make positive adjustments for underpayment and clawbacks for overpayment.

Process Delays

Challenge. Like late quotas, system issues can delay the initial incentive checks in the opening months of the new fiscal year.

Solution. Use the same solution as late quotas: Make monthly partial target incentive payments. When systems are up and operational, make positive adjustments for underpayment and clawbacks for overpayment.

Midyear Strategy Change

Challenge. Somewhere, midyear management decides to redirect the sellers due to a new corporate strategy, product repositioning or a merger/acquisition. Most likely, management wants to change the measures, reconfigure the jobs or deploy new jobs. In these cases, the strategy changes will require changes to the sales compensation plan. An inappropriate solution is to link the new pay plan to a full year performance even though the changes occurred midyear. Since you cannot (legally) rewrite history, the new sales compensation plan cannot be retroactively applied to past selling results.

Solution. Split the year into two periods. Terminate the current plan and make pro rata payments for the first part of the year. Next, launch the new partial-year plan. Finally, obtain new signed acknowledgments since you changed the incumbents’ pay plan.

Sales Crediting Mistakes

Challenge. Best practice is to have crystal clear sales crediting practices. A “sales credit” officially recognizes a sale for compensation purposes. Usually, management and finance have specific and well-understood rules about sales credit timing (e.g., at “booking”). However, some companies struggle with sales credit sharing. A shared credit means two or more sellers receive full or partial credit for the sale. Sales credit goes to those who helped successfully persuade the buyer to purchase. Here is the challenge: Sometimes, the sales event is unique with fluid participation by various revenue team members. In these cases, management allows regional management to allocate the credit, “…in this case, the national accounts get 50%; in this second case, national accounts get 25% credit…” Common outcomes from this type of sales crediting “flexibility” are complaints from the affected parties. Another crediting problem: missing mega-order policy. Sometimes, unanticipated mega orders arrive. Most compensation plans will address mega orders with a policy statement. Absent this statement, an unanticipated mega order can wreak havoc on quota outcomes and incentive payments.

Solution. The issue with “shared crediting flexibility,” is, well, shared crediting flexibility. The preferred solution is unambiguous, fixed rules for shared credits. We recognize that fixed rules may create some (minor and occasional) inequities, but it’s a better solution than vague field negotiated shared credit. However, when fixed rules are not suitable, implement a multilevel review and approval within the sales leadership team. Additionally, transparent, fully documented reporting across region leaders will help ensure application fairness. Finally, if unexpected mega orders occur frequently, then adopt a mega-order policy. This policy specifies how much of the order revenue retires quota and how the remaining sales revenue earns a lesser commission rate. Seek the advice of legal counsel before deciding not to pay an incentive payment, which you did not anticipate from mega orders. You will most likely be advised to pay it.

Exceptions and Quota Changes

Challenge. During the year, a variety of exceptions might be requested by field management. These include sales credit exceptions (as noted above), account reassignments, quota relief and formula adjustments. Account reassignments are “exceptions” to the original territory configuration. These changes are often necessary for a number of reasons: splitting territories, newly added target customers, sales contact optimization, point-of-purchase change and mergers and acquisitions. These adjustments will increase or decrease the assigned quota. Additional requests for quota relief (reduction in an assigned quota) can occur for a number of legitimate or questionable reasons. Other types of exceptions might include changes to the formula such as variance to thresholds or waiving pending clawbacks. Excessive exception requests might suggest a design flaw requiring investigation and correction. Finally, unfortunately, some exception requests attempt to manipulate the pay program. 

Solution. To begin with: Fewer exceptions are better, leading to a more consistently applied sales compensation program. If exceptions are necessary, multilevel approval and transparent reporting will improve the rationale and integrity for needed changes. Keep good records. You might need them in the future if sellers initiate legal action citing unfair treatment as compared to past practices. Be aware of repetitive requests for exceptions. These might suggest a flaw in the plan design or its supporting policies. In such cases, investigate and solve. What about quota relief? You need a policy to address the implications of quota relief. Does the amount of quota relief need to be redistributed to other sellers? Or does quota relief reduce the sales team’s total revenue obligation? Excessive quota relief will drive up compensation costs compared to revenue dollars booked. Best solution: Have a restrictive quota relief policy and enforce it. Establish an exception review board with assigned accountabilities and escalation protocols. Finally, request an internal audit to review exceptions and quota relief periodically. How often? Once a year is a good timeframe.

Unexpected Economic Disruptions

Challenge. Fed policies, pandemics, supply chain issues, competitor actions and any number of external factors can upend a well-crafted sales compensation plan. Add internal issues, such as production challenges and customer service issues, which can also impact sales outcomes. Some of these disruptions might accelerate sales results, such as an early government product approval, competitor missteps or unexpected high demand for your products and services. Other disruptions could have a negative impact and reduce sales results substantially. 

Solution. The sales compensation plan should neither enrich nor underpay sellers for outcomes out of their control. Minor disruptions should be absorbed without special accommodation. However, major disruptions are difficult to anticipate. The pandemic had revenue leaders looking for guidance. Many who faced abrupt shortfalls decided to provide pay protection guarantees to sellers. Meanwhile, companies with industries prone to ongoing disruptions should consider adopting a “trigger policy.” This policy initiates a review of the pay program and its quotas. For example, “…if average quota performance exceeds 120% or fails to meet 80% of objective, then management will review quotas and pay levels.” Your legal team will help you craft a midyear program change statement.

Legal

Challenge. A surprising number of companies (20% to 25%) report some type of annual legal issue with their sales compensation plans. The challenge might be a single terminating employee complaining of final sales credit treatment or, worse, a government agency set to investigate your Fair Labor Standards Act sellers’ exemption status. 

Solution. Start by educating your sales compensation stakeholders. They should know what can and cannot be done with the sales compensation plan. Next, regardless of how compelling an argument is for exception treatment, positive or negative, never violate your own documented policies. Your risk? You could be on the losing end of a legal complaint caused by your previous precedent. Short answer: Don’t try and solve legal problems yourself; get your legal team involved. Don’t be surprised if they retain outside counsel, who specialize in employment law affecting salespeople.

Stay Prepared

Most likely, your sales compensation plan will operate without incident. You did all the right things, and no hiccup will throw the pay plan off the tracks. Good job. You can exhale a sigh of relief.

However, for others, your sales compensation plan might run into some rough patches. Ensure uniform adoption of policies and governance practices. Anticipate as best as possible. Address issues as they arise. Utilize an exception review process. For all other surprises, be prepared to respond quickly with insight, consistency and fairness.

About the Author

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David Cichelli is a revenue growth advisor for the Alexander Group. Connect with him on LinkedIn.


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