Accounts Receivable – good sales comp measure or not?

A/R metrics in sales compensation plans are relatively rare. There is often an impulse to include them from Finance, but in the end the sales leadership usually manages to impress upon Finance the importance of freeing sales people to sell and letting a lower cost resource like an A/R specialist in finance take the lead on pulling in the cash.

That said, it’s useful to recognize that A/R can be attributed to one of two issues: deal terms, or on-time payment. Arguably the sales person has more control over deal terms, and deal terms affect A/R balances. So incentives around selling within the parameters of “standard deal terms” can make a lot of sense if that’s the issue (e.g., slightly reduced commission rate or sales credit for deals sold with non-standard terms). If the issue is late payment then the next question is whether that’s due to non-acceptance of the products/services (quality issues), or just chaos and customer cash retention. If it’s quality issues, then do we really want to penalize sales – they probably have their hands full selling in spite of the quality issues. If it’s chaos and cash retention, then it’s probably better handled by an A/R specialist.

In spite of all those caveats, it is a very solid practice to reverse sales credit for any invoice that is reserved for bad debt based on the company’s policies. This crediting rule has the effect of giving the sales people a real interest in avoiding non-collection, but on an exception basis (without carving out some portion of the incentive at target to fund an A/R metric). Then of course when the bill is paid, the sales credit goes back in for the sales person.

However, if A/R has become a significant issue for the company’s balance sheet then it is often a reasonable metric to put into the plans of sales leadership (not individual contributors). They often are the ones approving non-standard terms. And they can stay on top of the non-collection exceptions and put pressure where it’s needed to help with collection.