The True Expense of Commission Adjustments – Implementing a Governance Process to Prevent Losses, Seller Frustration and Finance Team Productivity

Closed Commission periods need to allow for corrections to occur. If there is no proper governance process you will continue to experience financial leakage, increased operations and unhappy sellers. 

 1. The Cost of Commission Adjustments 

As a sales compensation professional you know that you will receive commissions that need to be adjusted after the close of a period. Whether that commission came through too late, a customer cancelled an order, there was a sales credit issue or maybe just something wasn’t captured properly. There are always scenarios where commissions will need to be adjusted.

Its when there is no process around adjusting these transactions that costs you money.

Lets say you have $20M of sales incentives to distribute each year. You may be receiving many commission adjustments each quarter that you have to dig into and process.

There are costs associated with adjusting commission payouts other then the actual payout itself. Your finance team has to spend time reviewing those transactions, Payroll may be making payroll changes outside of the standard process, Sales Compensation is spending time researching and selling may question the accuracy of their pay.

The expense of commission adjustments isn’t just the payout amount but what else is being impacted by that adjustment. 

Lets say you had a sales credit of $5,000 that needed to be moved from one seller to another. Your Sales Operations team may have to look into the transaction to make sure its valid. They will verify the territory and notify Sales Compensation to update the commission plan. Once updated they will review if the change impacts any accelerators or payouts that may need to be adjusted. All of these actions take time out of each departments day and can have financial implications if accelerators are impacted.

Now multiply that by hundreds of commission adjustments your experiencing. This becomes a big problem. 

2. Commission Adjustments Need a Governance Process 

Some companies will open their closed periods to adjust commissions. While this may seem like an easy solution it can create other problems down the road.

By implementing a governance process you can ensure all of your commissions that need to be adjusted are being corrected appropriately.

a. Determine the type of commission adjustment 

You should be able to classify why your commission needs to be adjusted. Is it because of the timing of a transaction? Sales credits that need to be moved? Customers cancelling orders? Incorrect calculations on your commission plans? Maybe your management is granting commission adjustments to specific reps. Whatever the reason you should be able to identify the cause and create a process that allows your commissions to be adjusted.

Here are some examples of why commissions may need to be adjusted.

1.Transaction that came in after the period was closed.

2.Sales credit that needs to be moved to a different sales rep or territory.

3.Customer cancelled an order. 

4.Sales rep didn’t meet the correct attainment to receive a commission payout.

5.Company wants to grant commissions to certain reps outside of the normal process.

You want to know the cause so that you can adjust the transaction correctly and document why.

For example if your company overpaid a sales rep by $10,000 due to the incorrect commission rate you would handle that differently then a $200 adjustment for a transaction that came in after the period was closed.

b. When should commissions be adjusted 

Once you have identified what needs to be adjusted you now have to decide when and how to go about making the adjustment. There may be times where you want to adjust the commission in the current open period. Some adjustments may require a management override to adjust the commission. Others you may want to write off as an expense on your financials.

This will depend on your companies guidelines, sales comp plan, payroll requirements and legal requirements.

For example if a sales rep was underpaid by $1,500 due to a transaction coming in after the period closed. You may be able to adjust that commission payout in the following period if allowed by your commission plan. However if the commission payout impacts your reported financial numbers your finance team may want to reconcile that number.

By closing your periods you can start to gain more control of your commissions but still allow for adjustments to be made.

c.  Who should own commission adjustments 

Once you have a process in place to adjust commissions you will need someone to own the process. There may be multiple teams involved when it comes to adjusting commissions. Your Sales Operations team may verify that the transaction is correct. Your Sales Comp team may verify the transaction qualifies for commission. Your finance team may want to approve adjustments above a certain dollar amount. And your payroll team will want to know about any commission changes to distribute in payroll.

Make sure you have a workflow in place that will allow your commissions to be adjusted properly and not passed around between teams.

Make sure you document the original transaction, why it needs to be adjusted, what period it impacts, amount of commission prior to the change, amount of commission after the change, reason for the adjustment and any communication to the seller.

 3. Monitor Commission Adjustments 

Having a governance process for commission adjustments is great but you should be monitoring how often commissions are being adjusted. You want to reduce the amount of commissions that need to be adjusted but allow for necessary adjustments to happen.

Here are some things to consider when monitoring commission adjustments.

a.How many commission statements are being adjusted 

b. How long does it take you to research and adjust commissions

c.How much are you losing from commission adjustments

d.How many commission statements are disputed by sellers

e.What is causing commissions to be adjusted and is it a repeat occurrence.

Say you have 1,000 commission statements that are distributed to your sellers. 100 of those commissions need to be adjusted. Your commission adjustment rate is 10%. If you can implement better controls around your commission transactions you can decrease your commission adjustments. If you lower your commission adjustments to 60 you now have a 6% commission adjustment rate. You reduced your commission adjustments by 40%. Not only are you saving time by not having to adjust as many commissions but you will have more happy sellers.

By reducing your commission adjustment rate you can find areas that are causing you to adjust commissions. Maybe its because your effective dates aren’t being met when moving a rep to a new territory. You can then take those learnings and implement them in your sales compensation process to help prevent future commission adjustments.

The best commission adjustment process is one that you can prevent future adjustments.

 Final Thoughts 

There will always be commissions that need to be adjusted. Having no process in place to adjust commissions will cause your finance team to waste time and can cause payroll issues. It can also lead to unhappy sellers who don’t trust that they are being paid properly.

Make sure you have a process in place that allows for commission adjustments to be made. You can then monitor those adjustments and reduce the number of commissions that need to be adjusted.

What is your company doing to prevent commission adjustments?