When is a sale deemed to be finalised, and at what stage of completion of the sale does the sales agent get paid their commission?
Not every sales transaction is a simple process of handing over money in exchange for the supply of goods or services such as would be found at a car boot sale. Take, for instance, real estate or other negotiations where the final transaction follows a series of successful stages, that could take months, or even years, to finalise.
For example, a member of the sales team, whom we will call Kyle, works for many months in negotiating an intricate contract, resolving a number of factors, to arrive at a complex solution that:
- costs a couple of millions of dollars to the client,
- includes licenses for 5 years,
- requires various phases of development and implementation,
- has a service agreement where the customer pays for annual support and maintenance costs
- the product/service may take up to 1 year to install
- requires a team of 3 people to work on the implementation
- is paid for with split invoices
- to different locations
- in different periods and
- according to usage of the solution and
- the number of users.
All the above factors create a dilemma of how to structure the sales commissions and incentives for such a complex sale. To be fair to both the company and to Kyle, answers need to be found to such questions as:
- When is the right time to pay commissions to this sale?
- When is sales credit given to the sales person?
- Is the deal determined to have been completed when
- The documents have been signed, or
- The contract has been implemented, or
- When invoices are paid?
These questions open up another can of worms for Kyle. For him, the issues are more important than when payment is made, or in which payment cycle the payments are made to the bank account of the sales person on a monthly, quarterly or annual basis.
Before his months of hard work, the concern for the Kyle is how the company determines at which point in the sales cycle will Kyle see his commission?
When should Kyle be paid?
The answer to the above question is not straightforward as you may think. There are now a number of factors come into the equation:
- The mindset of the organization and its culture,
- The size of the organisation, and its accounting principles,
- The culture of the sales force, and the objectives the management has with it,
- The nature of the products and
- Current acceptable market practice (how do other companies handle it)
- and finally, risk factors such as
- What happens if the sale is delayed, and
- how those delays affect the sales contract, and
- whether the commitment from the company to deliver is not meeting the SLAs (service level agreement) signed.
We can analyze the issue here from two different perspectives, with both approaches presenting a solution:
- From the company’s viewpoint, at what point of the timeline does the accounting department record the transaction as a sale?
Unless the commision payment is seen as an advance of commission due, then for a sales credit to be issued, a sale has to be first accounted for in the company’s books.
So, for example, according to the accounting standards the company chooses to follow, it needs to record the sale. And once the invoice is issued, the company might use this point in the timeline of the sales process to also release the sales credit to the salesperson.
- The second approach is that from Kyle’s point of view.
In general there are no strict rules that enforce a company to follow their accounting process and sales credit, so commissions can follow the sales process.
If there is no valid reason why Kyle cannot be given a sales credit when a contract is signed with the client, the company may decide the benefits in maintaining the moral and health of the sales department by paying the commissions at that point are greater than the drawbacks of such a decision.
Sales people need to eat!
Catching up over a cup of coffee a few months ago, Kyle was confessing frustration with his sales position for an IT company, and in particular with the way sales credit was given.
Since only a portion of his commissions were credited and paid upon invoicing the client, he was upset because securing the deal was the only part of the whole transaction that Kyle had a hands-on involvement with.
His real frustration was having to wait for other people in the company to carry out the installation of the system, before he could receive the second part of his commission payment. He justifiably felt it unfair, since that part of the sales process had nothing to do with his role and influence. Being at the mercy of other departments while he waited for his payment was not helping his performance.
Kyle’s situation highlights a third factor that needs to be taken into account when deciding which approach to follow.
If the company is not careful to fully consider the sales process from invoicing through to completion of the product or service being supplied, it creates a strong possibility of demotivating a sales person.
From Kyle’s perspective, his job is done once the paperwork has been signed and the contract has been invoiced. And it is Kyle’s best interest to get his commissions as soon as he can.
It only seems fair that once their job is done, and the sales agents have earned their sales commissions, their payments should be released accordingly.
One way to avoid such conflict between management and staff, is for the sales management to have clear agreements in place. Points to consider include ensuring sales people fully understand their roles and responsibilities, including the when (at what stage after making the sale) and how, they will receive their commisions. By the company explaining what they require from their sales team at the outset, any misunderstandings can be avoided down the track.
Let’s have another look at Kyle, in his role as a product sales specialist, and Jeremy, who is a key account manager working with Kyle, selling IT systems.
If Kyle gets the sales credit when the agreement is signed, then Jeremy, the key account manager, may have to ensure the implementation of the system is smooth, so the sales credit comes at a later stage.
In this example, you can see how vital it is for a sales person like Kyle, to have a clear understanding of his role and responsibilities in the sales process, and help eliminate any feelings of frustration or being demoralised.
Because, no matter what the role implies, there is one factor to be taken into account, and this is the fact that giving a sales credit and consequently not paying a sales person at the right time, can quickly become very demotivating.
Remember, an incentives plan is a management tool that exists to motivate sales people, and careful consideration of the policy behind sales credits can eliminate problems that could arise in the future.
Because when sales people believe they deserve to get their sales credit earlier, and then don’t get them, it creates discontent, which can cause other problems, including the reputation of the company.
Policy making, motivation schemes, and credit timings
We’ve seen how Kyle can become demoralised through misunderstanding. Let’s look at other factors to consider in policy making and designing motivation schemes.
By overlooking the timing of sales credits there’s a big risk of creating a frustrated sales team.
People might think that there is an obvious answer to this question. Sales commissions must be paid when the customer signs the contract. This is quite common but not the only case.
Thinking broadly, there are other important points in a sales deal requiring attention from the sales person, in respect of payment, such as:
- In some instances, the company is more focused on building a relationship with the customer and will rewrad the sales people before any contracts are signed with the customer, in anticipation of a future sale.
- Here there is a risk that a contract is never signed by the client
- In any sale, you will see three points to be considered:
- Written express of interest
- Taking the order, or
- Finally when the customer signs an agreement
- Let us not forget the financial aspect to the company, normally assessed by the finance team, with specific guidelines as to when and how the company records the revenues into its accounting books.
- The interest of the finance department is to tie together the revenue booking and the incentives, on a timeline:
- When order is booked into the accounting system
- Issuing invoice – this stage shows that the contract is filed in the company’s systems and is now time to execute it.
- When customer pays the invoice. Just to highlight that during a contract period of one year we may have multiple invoices that are issued and paid in different times.
- There is also an interest from the product side, and it’s effect on the profit or loss for the company, in terms of quantities and cost of goods sold, and how that particular product adds or detracts from revenues that are landing in the company.
- The company is also interested in the smooth implementation and delivery of the service to the client. A slow or delayed implementation is not good for the reputation of the company; it will worsen the relation between the client and the company.
The main time points we identify here are:
- Implementation schedule – this is where the company needs to follow specific agreements and time frame agreed with the client.
- Installation delivery – it is common (depending on the product sold) that if installation is involved there is an agreed timeframe for the installation within the contract.
All the above stages are important for both the company and sales people to pay attention to, but still doesn’t answer the questions of:
1) when is the right time to award the sales person their commission
2) Why should a company pay commssion after a contract is signed but before the installation is completed?
Risk Of Pre-empting Sales
Every company wants to look after profits, the sales team, and the clients, and will always face risks in balancing this equation, such as:
- What if customer signed an agreement but he never paid?
- Whose job is to collect the money from the client?
- What if installation is delayed by years? And what if this delay is due to the client’s irresponsibility to allocate the right resources to the project?
- What if the company promised to deliver something that cannot deliver and the client sues the company?
Ultimately the company carries responsibility for the outcomes, and will win in some cases and lose in others. That’s the nature of any business. And so part of those decisions are a direct reflection on the sales person, and others are out of their control.
So, when is the right time to allow the sales credit? There are two perspectives, one that benefits the company, and the other that benefits the sales person.
In my opinion it is important to look after the sales person, for without sales, the company will struggle. So the responsibility lays with the company to define the sales role, decide how to motivate the sales people, and define their responsibilities and the management objectives with this role.
Let’s consider a situation of a sales organization that only sells one or two multi-million dollar projects a year:
With a large installation of the product, even after the contract has been signed by the client, the sales person remains as an important part of the team making sure a smooth implementation is happening. Commonly, the sales credit will be paid when the installation is finished, and the solution has been delivered to the customer
To decide on this question one needs to fully consider aspects such as:
- What the industry does and what is market practice.
- What is the sales role and the responsibilities of the sales person
- To only have the agreement signed?
- To have the agreement signed and then drive the implementation?
- To make the client pay upon receipt of invoice
- What is the objective of the company in regards to the motivation scheme
- To retain the good sales people?
- To make sales people responsible for additional tasks?
- What is the objective of the company
- Bring new clients?
- Make new clients happy?
- What is the nature of business and the project value
- Big volume tickets versus low volume but big value business?
By finding appropraite answers to the above questions, policy makers can make an informed decision about when is the best point in the cycle of the sales opportunity to give sales credit and pay commissions.
If for example it is clear that a sales person’s responsibility is solely to have the client sign the agreement, then all sales credit shall be released at that point of time.
If on the other hand, the company feels that customer retention is a priority, and the ultimum objective is to keep clients happy, than sales credit could be given at the end of the sale, once the product is delivered, the client has paid, and expressed his positive feedback.
An alternative answer to the problem that I personally support, is to split the commission into different portions to be paid at specific milestones of the sale. For example one can give 50% sales credit when agreement is signed and another 50% when installation is done.
In any event, the timing of sales credits should always reflect the responsibilities and the role of the sales person.
Operational and Administration
It is important to have a policy document that covers the handling of specific, often common, problems such as:
- Non payment
For instance, let’s say that all sales credit is given when the customer signs the agreement. There is always the risk the client doesn’t pay the invoice that is issued straight after, and he can pay within 30 days. The company can give sales credit 70% upon signature and the remaining 30% after 90 days, provided the customer pays.
As with everything, communication in the sales division is important for all parties, and by having established guidelines everybody’s job can be made so much easier, so that such situations can be handled within the motivation scheme and not outside.
And it would be the responsibility, as I repeated many times, for the sales person to follow up the payment of the invoices, to secure their remaining commission payment.
In many circumstances design teams and sales management ignore the power that a good decision in the design of the sales system. They forget the impact it can have on the sales force, and also how negative consequences of a bad decision can affect the company profits.
An important decision might be even in one of the details of the system design.
Sales credit and its timing might be not one of the major focuses in the design of the incentives scheme framework but is important in influencing emotions and behaviors of those directly affected.
Finally, make sure your print this article and place it in your policy document folder.
And next time you are asked to design a sales incentives scheme or commision plan, whether as a manager or executive, you can take note of all the points covered in this article, and reduce the risk of losing Kyle, or any of your other top sales performers, by ensuring you carefully consider the right time to award sales credits to your sales team.