There are two things that are always late. The first is my wife whenever we go somewhere that requires her to get dressed up*. The second is when commissions are paid.
This week, I received a question from a reader asking what I thought about her commissions being paid late due to production delays.
When thinking about this, I realized that commissions are always paid in arrears and are frequently delayed by factors outside of the rep’s control.
SInce this impacts many of my readers, I thought it was worth a post.
When Will I Get Paid?
Everyone who gets commission wants to know this. There are 3 things that determine this. (If you don’t yet have a commission plan, read my post here on how to create an effective commission plan.)
#1 Quota Cycle – when a sale must be made to count in the current cycle.
Here are some common quota cycles:
Monthly. Reps love this because they get paid frequently. Managers like that it encourages reps to close deals each month. One problem it creates is a fire drill every month for managers and finance to reconcile commissions quickly. Also, there will usually be clawbacks for returns, bad sales and non-payments from prior months.
Quarterly. Easier for managers because fewer commissions reconciliations are needed. Getting paid quarterly is OK for most reps. A downside is that sales will always be back loaded to the end of the quarter because there’s little incentive for a rep to close sooner. Don’t bother trying to change this. If you pay quarterly, your reps will sell quarterly.
Annually. Any good annual commission structure will include some kind of draw, guarantee or partial commissions throughout the year with a “true-up” at year end. Otherwise reps starve all year long. Like quarterly plans, sales will often come at the end of the cycle. If you pay annually, expect a back loaded year.
#2 Proof required to validate the sale.
This is a simple requirement. To validate a sale, the rep must provide one of the following.
- Purchase order
- Signed contract
- Electronic Order (website etc.)
- Deposit received
- Order shipped
- Order delivered
- Invoice Processed
- Payment received
- Service initiated
- etc.
#3 When checks are cut.
Commissions are always paid in arrears to allow the company time to reconcile commissions and approve payments. Here are some common examples.
Next pay period: Many companies try to pay commissions in the pay period after the commission cycle closes. For example, if you pay quarterly commissions but cut salary checks 2x a month, then commissions will be paid 2 weeks after the end of the quarter.
Next Month: Some companies take longer. It’s also common for commissions to be paid approximately 30 days after the end of the quota cycle.
Much later: One company I worked at paid commissions 6 weeks in arrears! New hires didn’t receive their first quarterly commision check until their fifth month. I can confirm it sucked.
Most companies pay as fast as they can get the commissions reconciled and into the payroll system. If yours are always late, see if you can simplify or expedite the reconciliation process. That’s usually where the problem lies.
Common Problems That Delay Commissions
- Missing sales “proof”: This happens when a rep doesn’t provide the required proof but tries to negotiate to have a sale included anyway. The PO might be “on the way” or they have a verbal commit or they “know it’s coming”. Whatever. Management should take a hard line on this. If you make an exception for these once, it snowballs into a mountain of exceptions going forward.
- Cancellations, Non-payments, Returns: If possible, reps should be given a chance to make a collections call before a commission is clawed back. If you have to clawback commissions, it’s fair to back it out of a rep’s current and future commissions, but leave his base salary alone. Make sure you let them know too. (One company I worked for did an unannounced clawback to cover a finance overpayment that left several of my reps with no paychecks for 4 weeks. My reps had checks bouncing and automatic withdrawals failing. Our company ended up paying late fees for the reps. We lost days of productivity as my reps scrambled to get their finances sorted out. It also created a lot of unnecessary stress that could have been avoided.)
- Internal delivery problems: Production does not ship on time, customer service cannot get the product working, finance delays credit approvals. These happen all the time. Generally, I don’t recommend making exceptions and paying commissions early here. You’ll spend to much time reconciling exceptions.
- Splits, team sales, employees leaving etc.: Try to be fair. If possible, meet with management and everyone affected to define the split in advance. When that’s not possible, I’ve found the best way to deal with them is for the manager to meet in private with everyone involved and ask what they think would be fair. Sometimes their greed will surprise you. But often, so will their generosity. A good manager can usually come up with a reasonable compromise.
What if you don’t like it?
If you’re paid commissions and disagree with your company’s process, I suggest first reading the plan to see if you are following all of the rules correctly.
If you are but still have a suggestion that might make it better talk to your manager. He may be able to help you change something you are doing that can give you better results.
Don’t get your hopes up that you can change the commission plan. Reps and managers can rarely make this happen. In most companies, the plan is created and approved at the top and very difficult to get changed (except in way you won’t like).
- In small companies, you have a small chance of changing the commission plan. (less than 5% chance)
- In large companies, you have a 0% chance of getting the commission plan changed. Don’t beat your head against the wall. Either learn to work within it or find another job.
Pick your battles for exceptions.
You likely won’t ever change the commission plan, but you might be able to argue successfully for a one-time exception on a specific deal. Present the facts to your manager, plead your case and ask for his thoughts. Be reasonable and use your sales skills.
At times, I’ve made exceptions to double comp a deal, give quota relief, split deals or do other creative things to help a rep get paid for a unique situation.
Good luck and good selling,
Steve
*PS. My wife no longer reads my blog so it’s safe for me to write this.