Reducing sales compensation for bad debt

Question and answer format

Question

How do most companies handle sales compensation when there is a write-off for bad debt. Do they charge them back on the cost the company is out, or the gross profit they would have made if the customer paid?

Answer

Most of our clients do charge back the sales credit for deals (or portions of deals) that are written off for bad debt. If you are paying based on the sales value, then the sales value is what would normally be reversed. If you are giving sales credit and paying based on deal margin, then the margin value of the deal that was originally credited (or an appropriate fraction of it if the write-off is partial) is what is reversed out of sales credit. The tricky part is whether you reverse either (1) the compensation that was earned on that deal at the time it was credited, or (2) the sales credit for that deal so that it reduces compensation in the measurement period in which the credit is reversed. The right answer to which of these to implement would be based on the detailed mechanics of your compensation plan.