Commonly, when the sales representative reaches his sales plan, he should be awarded … with an even higher target for the next period. Since he has managed to reach the upper limit, we cannot allow him settle on it. The research that Varcent has conducted on this topic clearly states: this is a mistake. So how?
The challenge here is that the perception of the goal and the likelihood of achieving it is extremely individual. This concept, known as psychological distance, combines four elements, each of which is shaped by the individual’s experience of distance: spatial, temporal, experimental and social. So before you decide to increase your sales limits for another period, try to put your spreadsheet aside and answer the following questions:
1. Will the team’s psychological distance change when new goals are set?
2. Will it increase the team’s motivation to work?
3. What can you do to shorten this distance?
Also remember that the COVID-19 had radically changed the way people buy. Sales teams are faced with tremendous customer uncertainty. Freezing budget, rapid changes of clients priorities and stakeholder make it harder than ever to achieve your sales metrics and compensation targets. In 2020, all job satisfaction scores decreased for sales development, customer manager, and customer success. Most plans over-index the results (signed, closed, won). When these results are less predictable or more difficult to achieve, as was at the beginning of the pandemic, performance decreases, wages decrease, and employees are less likely to be retained in the company. Improving sales productivity is the key challenge facing sales and operations leaders, and your comparison plans are the most important tool in your mix. The Varicen Report, ‘How to Build Better Comparison Plans in 2022’, provides insight into SDR, AE, and CS benchmarks, and includes plan structures, limits, and reporting guidelines that will increase your team’s productivity and satisfaction. You will find it here:
Budgeting of incentive plans – scope, not average.
Budgeting of sales commissions can really overload the brain of many managers. We spend a lot of time trying to predict the future when in reality it is simply impossible. It is virtually impossible to predict the entire year in advance in terms of what the sales results will be, on the one hand, and business expenses, on the other. But when you look at what you don’t know from a different angle, you can start to make better decisions. Uncertainty can be divided into three sources: complexity, ambiguity and probability. You really don’t know what will happen to your budget for one month or one year from now, but you should have a clearer picture of the range of possible outcomes. There are many moving parts, steps, and assumptions that you likely to adopt in your sales cycle, so instead of thinking about average performance, start thinking about scope. Ask yourself what is the real likelihood that you will always achieve your goals? In order to predict this more accurately, it is necessary to define the minimum and maximum results of the sales cycle. Your budget forecast is usually one point on the chart, but you can see a much wider expected probability. Have you heard about Monte Carlo Simulation? This analysis simulates 1000 random scenarios with a number of different factors to adequately budget your sales earnings.
Commission contracts – must-have checklist
Commission sales contracts are often created in a rush and are an extremely tedious part of administration of sales commissions. Therefore, below you will find four key points you need to be aware of in order to have clear, fair and legally enforceable plans.
Sales commission contracts must cover several key elements
a) they must be in writing and signed by all parties of the contract
b) the contract must clearly state how the sales representative will earn the commission. When you create offer for your team, you indicate the variable bonus that they will earn in their role. Your contract must show what these results are.
c) explain how the commission will be calculated and paid. Review the metrics you are using to measure effectiveness and include additional conditions that must be met for recognition. Remember that commission payments are legally due no later than 30 days after the end of the measurement period.
Accounting of commission payments and sales activities
Accounting for commission has a significant impact on how investors, auditors and tax authorities perceive your company. Your accounting choices will have a significant impact on your benchmarks and the way you are perceived compared to other companies.
One of the metrics you should aim for is CAC (Customer Acquisition Cost). This indicator measures all sales and marketing expenses (including commissions) incurred during the period, divided by the number of customers acquired during that period. This number (combined with the customer’s expected value) indicates how efficient your sales processes are and how scalable and profitable your business can become. The problem with this method is that the settlement of commission costs has become quite complicated due to the principle IFRS 15. This principle entered into force in 2018 and 2019 and has substantially changed the way in which commissions on expenses are accounted. Remember, your company should use this standard of revenue recognition as normal business practice. Essentially, this principle has forced accountants to view sales activities as part of a lifelong customer relationship.
Of course, some sales activities establish a new long-term relationship with the customer. Now you need to spread these activities over the estimated lifetime of the client.
Other activities strengthen existing relationships and should be accounted for the contracted service period.
Some sales activities may or may not result in revenue.
All these activities should be accounted for according to the costs incurred.
And although the commission accounting is very technical, it doesn’t have to be difficult.
Interested in learning more?
Book a conversation with a software developer – Varicent or with us – a technology implementation partner; to find out how we can help.