No one likes making a loss, especially when they’re contributing to the financial stability of a company. In the life of a Finance leader, understanding when you overpay your sales team and the following course correction needed can spiral into a make or break moment way too often. Mistakes are unintentional but they can have consequences that can severely affect the health of the company.
Sales teams are one of the most talented folks that push the companies to reach their vision. With the breakneck pace with which companies keep moving ahead in their journey to outpace each other, it’s important to retain the best of talent. An incorrect CRM entry can have a ripple effect across different departments like the sales payout, directly forcing the RevOps teams to manually verify the payout, and overload the finance team by making them responsible for executing the payroll. As a finance leader, it becomes your responsibility to ensure no disruptions in the process considering erosion of trust between departments.
In this blog, we underline the heavy costs associated with commission overpayments, and the importance of providing accessible transparency in commission structure.
Why do overpayments occur?
While you may not like it when your sales reps charge you at the end of every month, asking you to explain how their commissions are calculated, you can’t blame them. Not only are compensation structures complex, they’re also not transparent enough for your reps to grasp clearly, leading to companies overpaying or underpaying.
Here are the two main reasons behind overpayments in sales commissions.
Manual errors are one of the most common causes of sales commission overpayments. This is because the calculation of commissions can be complex and time-consuming. Mistakes creep in when there’s one master spreadsheet for sales compensation computation that then needs to be split into multiple spreadsheets for each rep with his/her unique comp plan structure. And then, these multiple spreadsheets need to be further distributed confidentially to each rep and their respective manager. Therefore, for reasons more than one, spreadsheets are just not the answer for sales compensation management.
For example, a sales rep may be mistakenly credited with a sale for which the commission rate was calculated incorrectly because of later conversations they had with the account executives. The contract the sales rep went with, and the contract that the client signed up for can be drastically different in specific cases. There can be different interpretations of saas sales commission percentage, when it plays into a sales strategy.
Forcing a simple solution on large scale operations
A manual effort to calculate the right numbers when done on a larger scale individually to every sales rep, can cause disruptions on a much larger scale. The errors can occur when there are changes to a company's commission plan or when there are errors in the contract data as well. For example, if a company changes its commission plan to include a new tier of bonuses, it is possible that some sales reps may be credited with money they haven’t earned yet.
Similarly there can be a complete mismatch between the way the finance team looks at it against the way sales team leaders look at it. If there are errors in the contract data, it is possible that the wrong amount of revenue will be recognized, which could lead to overpayments.
Spreadsheets are not designed to handle the complex calculations required for sales compensation, and they can be easily corrupted. This can lead to inaccurate payouts, which can damage morale and productivity. A sales software solution is designed to handle complex SaaS scenarios, right from tracking sales activity to calculating payouts.
Why aren’t spreadsheets the answer to avoid overpayments in SaaS sales compensation?
Being one of the most customizable tools to use, Excel and Google Sheets are an accepted norm for companies in the beginning of their journey. When the company starts growing, within the functions it serves and in separate directions, the customizable ease of use of sheets can spiral and become a limiting factor in the way they operate.
- As a SaaS company grows, its sales commission structure becomes more complex. This can be even more difficult to keep track of when there’s a mid term policy change along with all the factors that affect commission calculations in a spreadsheet.
- Spreadsheets are an opaque medium to show the compensation for a scaling team of sales reps. It often makes it even harder for sales reps to understand their commissions. This can lead to confusion and frustration, and directly impact morale.
- It’s hard to manage an organization level payroll and the payment structure in a spreadsheet. This can lead to delays in payments, which can damage customer relationships.
ASC606 and the need to embrace technology
ASC 606 revenue recognition regulations came into effect in 2018. Ever since it came into action, it has changed how sales compensation is calculated by prioritizing transparency in the process. The recognition standard is one of the biggest reasons why spreadsheets fail in a scaling organization.
- ASC 606 requires companies to be more transparent about how they calculate sales compensation and how they look at revenue recognition. It requires companies to disclose the specific factors that they use to calculate commissions, such as the amount of revenue generated, the number of deals closed, and the length of each sales cycle.
- This increased transparency is important because it helps to ensure that sales reps are fairly compensated and know how their sales translate into remuneration. It also helps to prevent companies from overpaying their sales teams, which can be a significant financial risk.
- ASC 606 needs companies to recognize revenue over time, rather than all at once. This means that companies must track the progress of each sale and recognize revenue as it is earned. Along with providing visibility over how the sale develops in future until the pen is put on paper.
Does a spreadsheet do what ASC606 compliance needs? That’s the question to answer. In a company that’s growing exponentially, the operational overload can be a huge factor in pulling several departments down. By investing in a sales incentive software, you solve disputes before they happen by providing everyone the clarity they need.
Transparency- the must-have for scaling companies
The fastest way for a CFO to deal with conflict about compensation is to limit the interaction and pay the sales rep of the figure they’ve calculated and come up with. It’s the fastest way, but at a cost that’s highly unsustainable. This way of going about things handles the conflict at an individual level instead of providing visibility to everyone involved over how revenue looks in real time. The costs that the company bears from this are often astronomical on a macro level. A few of them are:
Internal disputes and manual interventions
Arising from delays and inaccuracies in payments, the teams across the board will have a lot of internal disputes emerging from the confusion. Sales team’s bandwidth starts taking a hit because they need to keep raising tickets to the finance team to get the confusion cleared on their compensation structure. After which the operations teams will need to deviate from their responsibilities and look into what’s causing the issues and what are the immediate fixes, time and again.
Steady decline in sales productivity
A repeating cycle of frustration can severely demotivate people that are working to move the needle. When the business they create by doing the groundwork doesn’t repay them through the compensation they deserve, it breeds confusion on where their efforts lie and how they should approach the next quarter, and where they should even invest their time.
Compensation is the best form of feedback for your sales reps.
- Sameer Sinha, Co-Founder & CEO at Visdum
Attrition and declining sales targets
Motivation does wonders to what your salesperson can do. But how does restricting revenue visibility affect the people involved? It takes a lot out of your teams to have your back when you aren’t staying consistent on the payouts. When there’s an overpayment and a mistake from your end, it also means you’ve given money that you need to retrieve from the sales team. At an individual and emotional level, you’re not taking the money you’ve given them by mistake but you’re taking the happiness of seeing a bigger paycheck away from them.
This grim situation often leads to salespeople jumping ship to a different organization to find a commission management system that rewards them better.The loss of motivation becomes eminent when the sales targets need to be readjusted for your compensation plan to kick in the way it needs, and that loses the focus of having a target and a strategy in the first place.
Expert’s Playbook on Managing a Sales Compensation Overpayment Crisis
What should you do when you’ve dispersed higher commissions than you should?
Understand there are things that you can do to re-correct the course but there needs to be a method to limit the damage. Here’s what Sameer Sinha, a veteran sales leader and Co-Founder & CEO of Visdum suggests:
- Effectively communicate and explain how each person has been overpaid and by how much, explain with utmost clarity and involve their immediate manager in the discussion.
- Explain the clawback procedure and the way you want to adjust the overpayment in the upcoming duration.
- Elaborate the structure that’s being put in place to avoid such issues in the future to restore trust in the system.
- Be transparent in having a discussion with everyone affected by the error and be proactive in addressing the concerns.
- Most of your reps will worry that a process that overpays will also underpay, leading to shadow accounting. Navigate such cases by communicating transparently.
How to clear the backlog and handle the animosity between teams?
Check and recheck all the calculations in the process to make sure you don’t start a conversation without having a reason behind it. Here are 4 things to ensure there’s no friction between two different teams:
- Be 100% sure of the clawback amount and back it with the rationale of the specific clauses in the plan document.
- Break down the problem and the process to the manager first and get them on the same page. This is important as sales teams often suspect that finance does not want to pay. It’s critical to align sales and finance teams to remove suspicions from their mind.
- Ensure all similar cases are treated the same way and eliminate subjectivity from dealing with the problem.
- Give them the exact clawback amount and the dates when the clawback will happen. Be as clear as you can be in the process.
How to take responsibility before things spiral out of control?
Transparency is ideal when dealing with human mistakes. With the right details and the right method in place, accept responsibility and then take a stake of the situation. The following would be my rules to follow:
- Communicate with sound clarity while being fair. The payee is the one that’s affected at the end of day, they shouldn’t feel that the process is unfair.
- Involve the sales manager or the leader as the arbiter in the process, convince them that the process is right and in the best interest of the way ahead.
- Be hands on with the sales team during the process and beyond to ensure that the morale or the motivation is not compromised.
- Invest in a system that ensures that this problem doesn’t repeat itself. A repeat offense can severely impact trust and inevitably lead to attrition.
How to ensure mistakes don’t happen again?
As mentioned above, there is a chance that you lose out on some of your brightest potential because of an error, especially when it repeats itself.
- Design and document the compensation plan comprehensively with utmost diligence. Cover all possible scenarios and prepare the system with dummy data.
- Communicate the plan in detail and explain the plan clearly and make it accessible at any point. Record the explanation so that you have proof of what you have at hand.
- When computing commissions, adhere to what’s established in the plan and avoid ad hoc interventions, and creating exceptions or adjustments.
- Share commission calculations within the period as a practice to ensure a smooth payout process. This will help clear out any misunderstandings before the payout.
- Automate a bulk of the process, draw a line at which the manual work gets too heavy for you to take on and use technology to fill in the gaps.
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