Accrual and Actual payout variances have been an endemic problem across industries, particularly in organizations that still heavily rely on manual spreadsheets to model their sales compensation plans and those that do not have closed loop automation.

Worse still are organizations that consider manual reconciliation of the sales compensation payout with their accrual as a normal activity during the close of the quarter. This results in the extra time spent by finance and sales teams to validate payouts, reason variances and increase efforts to reconcile forecast and what will be paid out.

How do the best in class Sales Operations teams sustain a variance of less than 1%? What best practices and tools do they use to minimize the accrual and payout reconciliation cycle with finance? How can your sales team enjoy the benefits of an accurate accrual forecast with less than 1% variance?

In this article, we shall explore practical best practices along with use cases of how organizations were able to meet less than 1% accruals variance to help you as a sales operations professional align with your finance team in budgeting and payout, and build better trust with the sales team on forecasts.

Why does it matter to have a Low Variance in Sales Compensation Accruals?

1. Financial Stewardship and Accuracy

Sales compensation accruals will show up on the financial statements as liabilities. Therefore, close and accurate reporting are critical for audit, SOX, and reporting to investors.

2. Trust and Alignment between Sales and Finance

Large variances often lead to Finance challenging Sales Ops during the plan’s annual or mid-year planning process and reviewing assumptions (budgets, forecast volume, pricing, mix, timing, etc.) in detail. This decreases agility and increases manual effort at plan design and quarterly forecasting.

3. Cash Flow Optimization

Optimal cash is tied up when you over-accrue, and cash becomes constrained when the time comes to payout and the organization has not provisioned for it. This usually results in treasury teams scrambling to free up cash for payout. A variance of less than 1% helps achieve a stable, predictable cash flow.

What are the key reasons for Variance between Accruals and Payouts?

a.Poor Forecast Accuracy
b.Delayed or missed quota changes
c.Manual or Spreadsheet-based modeling approach
d.Complexity of plan and plan exceptions
e.Delayed Credit Assignment or disputes
f.Limited or no scenario modeling for SPIFFs or Overachievement bonuses.

What best practices should you follow to achieve less than 1% variance in Accruals?

1. Adopt a Centralized, Automated Sales Compensation Platform

The first critical step in realizing less than 1% variance in Accruals is to have a foundational enabler, which is a robust, automated, and configurable sales compensation management software or platform. The right solution will tie into your CRM, HRIS and ERP systems to give you real-time access to the data you need in order to visualize and accrue, dynamically, for sales crediting, quota changes and quota attainment.

Use Case:

A SaaS company with businesses in Asia, Australia, and the United States adopted an ICM (Incentive Compensation Management) platform and moved away from Excel based commission modeling. Within 1 year, the finance team saw the variance in accruals come down from 4.3% to 0.9%, due to better visibility, tracking and automation of quota proration, territory changes, plan exceptions, and true-up logic.

2. Align Sales and Finance Teams in the Planning Process

Sales Operations should not model accruals in isolation. Commission accrual modeling is not just a Finance function.

Sales Operations teams must develop planning logic, target assumptions, timeline, pacing, with the sales organization from the start of the planning process to achieve better alignment, ensure forecasting is easy and fast.

Aligning on plan design and detail like Sales Performance Incentive Funds (SPIFFs) expectations, quota deployment timelines, management exceptions are also important for ensuring the best forecast fidelity possible in forecasting.

Tip:

Use historical attainment curve, prior plan performance data as a starting point for forecasting and take into account additional growth expectations and strategic initiatives.

3. Forecast models should simulate the actual commission plan logic.

Accrual estimates are not “ballpark” figures of an expected payout. Build a forecast model that simulates the actual commission logic of the plan and includes tiering, accelerators, splits, and pass-throughs (ramp policies), clawbacks, and other variables to simulate payouts accurately.

Use Case:

A large telecommunications firm used scenario-based forecasting by incorporating plan rules logic like 2x accelerators for sales representatives that achieved 120%+ of their quota. The model was able to dynamically forecast payouts based on pipeline, current conversion trends and actual bookings.

4. Feed real-time performance data into your Accrual Forecast Model

Accrual Forecasting is not a one-time activity during planning or quarterly forecasting, especially in large, enterprise-sized organizations. It is a continuous cycle of making sure to feed in near real-time CRM and ERP data into accrual models in order to keep up with performance changes, pipeline movements, and any changes in sales representative territories.

Recommended Practice:

Automate weekly refresh of bookings and attainment data.

Run predictive models at the end of the month (or every 2 weeks during Q4) to help adjust for any changes in pacing and changing assumptions.

5. True-up accruals for both Quarterly and Annual Cycles

True-ups are usually done as an adjustment of over or under accrual for past periods. However, to have less than 1% variance, true-ups should be a formal step in the close process.

Best Practice:

True-ups should be a structured item on the quarterly close meeting. Every accrual adjustment should be noted down as part of the close process.

The reasons for every variance (major or minor) should be documented and explained. Common reasons could be from unanticipated ramp-up/pipeline situation for new sales representatives, territory movements, or quota changes.

Finance teams should be communicated the changes for better transparency.

6. Establish a system of version control for your plans and any modeling assumptions

Plan versions as well as modeling assumptions and inputs should be locked once an accrual is calculated for a given period, and all other changes to the model and plan should go through a formal change request.

Governance Checklist:

a.Plans should be locked in a compensation plan library.
b.All changes in assumptions and plan logic should be tagged with a version identifier.
c.Make-checker maker-review workflows should be adopted.

7. Perform a Variance Root-Cause Analysis at the end of every close cycle

a.After every close cycle (quarterly payouts), take time to do a formal variance root-cause analysis.
b.Where did accruals differ from actual payouts?
d.Was it from delayed data, policy exceptions or human errors?
e.How can we improve process, time or improve forecast logic for next time?

Use Case:

A large manufacturing firm in the automotive sector realized 80% of the reason for its accrual error was late launches and missing information about SPIFFs. It put in a policy that required at least 45 days notice before launching a new sales incentive program, thereby, eliminating mid-quarter surprises.



Tools and Technology that help improve the <1% Accruals variance

a.ICM Platforms
b.BI/Forecasting Tools
c.Data Integration Tools
d.Governance System Tools

The right mix of tools provide connectors, workflow approvals, and collaborative modeling environment necessary to deliver consistent, auditable and real-time accruals.

Organizational Habits that help drive success

a.Monthly cross-functional planning review between Sales Ops, Finance and HR teams
b.Regular forecast modeling training for regional sales leaders
c.Documentation of all plan rules and payout conditions
d.Culture of accountability for assumptions and inputs

Summary: Precision is not only possible, but expected

Achieving a variance of less than 1% between accruals and payouts may not seem aspirational, but more of an operational discipline. With the right technology, forecast methodology, process discipline and governance structure, Sales Operations teams can build a closed-loop process for every dollar accrued is traceable, optimized, justified and agreed.

The idea is to transition from reactive reconciliation to proactive precision. Not only does this strengthen financial control, but it also helps build trust and cross-functional alignment between finance and sales operations, all while enabling the organization to pay out performance fairly, fast and accurately.