Tag Archives: Sales credit trigger

Adjusting quotas mid-year. . . Should we? And if so, how?

The problem

Sometimes our sales people lose business due to factors outside their control (e.g., customer bankruptcy, mergers, incompatibility of our offering with their requirements). Do we reduce quotas when this happens? 

Why do you have a sales incentive plan?

The first thing to keep in mind is that the sales compensation plan, and the quotas, are in place to do something very important:

Provide motivation and focus for sales people so that they deliver more and better results than they would have without a sales incentive.

Of course this needs to happen at the right cost of compensation for the business, and with fairness among sales people in mind, and in a way that helps attract and retain key talent, and without encumbering the company with excessive risk or administrative burden, and. . . But it’s good at these moments to go back and remember the main objective of our efforts with sales compensation, as this will help us find the right answer in tricky situations.

How much “lost” quota before an adjustment

So, with the goal in mind, it’s usually best to adjust the quota if it appears that failing to do so would undermine the motivational value of the plan. Usually this happens when a meaningful chunk of the sales person’s quota is “lost” due to forces beyond their control.

How much is “meaningful” depends on the degree of accuracy in the quotas.

  • If the role is primarily new account development, then you’d expect substantial variability in quota attainments (say, 80% of people end the year between 50% & 150% of quota). In this case, you might adjust the quota if as much as 30% is “lost.”
  • However, if the role is primarily account management and quotas are therefore more accurate (say, 80% of people end the year between 80% & 120% of quota), you might have a threshold in the plan of 75% of quota, and so might need to adjust the quota for “lost” business of only 10% of quota.
How much to adjust

The lost business should free up some sales capacity, allowing the sales person to pursue other opportunities. So clearly 100% of the lost business would be too much to adjust out of the quota. Something between 30% and 70% of the lost amount would probably be reasonable as an adjustment, depending on the length of the sales cycle and the degree of penetration of the assigned accounts/territory.

Managing the adjustment process

Businesses that make a regular habit of adjustments will find they receive more and more requests for adjustments unless they have an adjustments policy and process.

An adjustment policy should cover:

  1. What the criteria are for considering an adjustment (e.g., at least 25% of the annual quota is no longer attainable due to circumstances outside the control of the sales person)
  2. What the process is for requesting an adjustment (e.g., submit a request to your manager, who will then need to approve it and forward it on to the sales compensation committee for review at the quarterly meeting)
  3. Likely adjustment outcomes (e.g., the sales compensation committee may approve a quota adjustment of up to 50% of the lost business if they feel it is warranted).
What do other companies do?

WorldatWork, along with Better Sales Comp, completed a Quota Practices Survey in 2012. Click through to find answers to questions about prevalent practices.

At what point should sales people be paid?

First, there are two different “trigger points” in common use in sales compensation plans: sales crediting and payment. The sales crediting trigger is the moment at which a sales person receives credit against their goal or quota, which may allow them to move to a higher payment tier. The payment trigger is the moment at which the compensation for the sales event becomes payable to the sales person (though payment will not be delivered until the next processing period, typically at month- or quarter-end). And, to be complete, there may also be an earnings trigger – the payment can actually be an advance against future earnings.

For example, in large ticket software sales a comp plan may stipulate that

Credit trigger: Sales credit is given when the order is booked (deal is signed), relieving quota and moving the sales person up in the tiers towards a higher payout rate

Payment trigger: 50% of the compensation value of the deal is paid following signing, and 50% is paid following payment of the first invoice

Earnings trigger: Compensation is earned only when cash is collected and all payments in advance of this are draws against these future earnings (which gives the company certain rights to reverse payment/sales credit in case of cancellation or non-payment by the customer)

For the purposes of this discussion, we’ll assume that the most typical arrangement is in place regarding the three triggers above, which is that sales credit and payment are triggered together at the same time, and that earnings are always triggered at cash collection to allow for charge-backs as needed.

The four most usual crediting and payment triggers are:

Order intake (/booking)

Sales job: Obtain new customer acquisition, new business

Typical in: Larger companies with dedicated new business roles, stable processes, robust deal review; long term contract sales

Product shipped / service delivered

Sales job: Book orders from new or existing customers that result in delivered value

Typical in: Many businesses – this is the most typical sales credit/payment trigger

Revenue recognized

Sales job: Book orders that result in recognized revenue in the measurement period (e.g., year)

Typical in: Many businesses since it’s the same as the prior category in most cases; for software, revenue recognition rules can make the timing of this a bit tricky, and recognized revenue is a common measure/distinction for services sales and account management roles

Cash received

Sales job: Sell, and ensure fulfillment and collection

Typical in: Earlier stage businesses where funding the commission requires the cash; businesses selling to markets with colleciton issues; long term contract sales with a preference for up-front payment

The principle is that you should pay the sales person soon after two conditions are met:

  1. Their job is substantially “done” and you’d like them to move their focus off of the old sale and put most of their energy into new opportunities, and
  2. You know what the sales is worth, within about 10% (this may mean you can’t fully pay for rate-table sales, like a rate for hourly work with no commitment to a specific number of hours, until a usage rate is established or the invoices are generated).

Relevant to this discussion, but a subject worthy of separate treatment is the issue of the “annuity tail” that may grow and attach itself to your comp plans if you pay based on invoice for long-term contracts. For several posts addressing different aspects of this problem, see this link.

Looking Ahead: Should We Make a Change?

From July 2010 Sales Compensation Focus, a Publication of World at Work.

By Beth Carroll and Donya Rose

The economy appears to have taken a positive turn and many companies are starting to think about growth:  hiring more sales reps, launching a new product, or breaking into a new market segment.  One of the first questions that is raised when a company returns to growth mode, especially if there has been significant retrenching, is, “What should we do with our sales compensation plans?” Odds are high that the right focus for the recession is not going to be the best focus for the company’s growth phase. It may be time to take a hard look at your sales incentive plans.  There are some key indicators you can check to determine if it’s time to make a change, and if it is, if you can afford to wait until January 1 (or the start of your next fiscal year) to implement the new plans.

    1. You scaled back (or perhaps eliminated) incentive compensation during the recession, and now you see that your people are not engaged fully to capitalize on sales opportunities.You need to act as quickly as possible to regain momentum and re-energize your sales staff. While this is not a situation that should be left in place until the start of the next fiscal year, a full redesign of the plans may not be the only alternative. First, consider SPIFFs, contests and recognition programs. Are there things that can be done that will quickly drive new sales and create increased enthusiasm in a cost-effective manner? Second, consider adding a small “bounty” type incentive that provides additional income tied directly to the performance you need most right now (e.g., new customer acquisition), but that limits your exposure if sales opportunity radically exceeds or falls short of your expectations. Third, if you can, consider a stub-year plan that will shift people in the direction you will want to go at the start of the next fiscal year. If you filled in an incentive gap by increasing base salaries, you can start to move them back down again. If your employees have been earning 60% of what they earned in better years, you can start to bring that number back up again by developing a more modest incentive program with less leverage than was appropriate in more stable market conditions. In addition, you should consider the culture that has been enforced (or created) by your sales compensation program. Should you add a team-based element to keep the focus on working togethe
    2. You scaled back your expectations in terms of goals or volume production, and now you are starting to see payouts that are far higher than you expected. This is also a situation that has the potential for serious negative consequences on two fronts. First, your company’s financial performance could be adversely affected by overpayment in the incentive program. Second, your employees’ sense of their own value in the market place could be inflated beyond reasonable expectations. It is remarkable how quickly salespeople come to expect a higher level of earnings on an on-going basis once they have experienced it for a few months or quarters. It can be very hard for them to accept the adjustment that will inevitably be required. Quick action is needed to recalibrate expectations, supported by thorough modeling to make sure that pay levels return to appropriate levels without damage to morale, and while still providing significant upside earnings potential for true top performance.
    3. You are finding it difficult to hire top talent, and the reason cited is the lack of a competitive compensation package. You can take a two-pronged approach on this and develop a plan for new hires that would be a lead-in to next year’s plan for the existing staff. Because many companies provide a guarantee for new hires, such an arrangement is possible for a few months before any significant discrepancies in the two versions of the incentive plan are felt. However, you will want to make the transition strategy clear for the incumbents so they know that at a specific future date they will be moved onto the new incentive plan as well. Many salespeople have become leery of 100% variable plans, as they’ve seen what can happen when they fail to cover their draw month after month. Even top salespeople in industries that are highly risk-tolerant may be more interested in finding programs with at least a modest base salary. A 40/60 to 60/40 pay mix is reasonably aggressive, and yet either option allows some degree of control from an employer/employee perspective while providing salespeople with a greater sense of security. Of course, the less variability in the plan, the less leverage on the upside, as this is a necessary trade-off. But it is one that can be designed to provide very attractive earnings opportunities to true top performers.