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CompensationMaster Newsletter Article, July 2001 One topic we often hear debated is whether to pay sales
representatives when a sale is made or when the company receives payment from
the customer.
Many companies pay when the sale is made because they want to
provide instant gratification to the representative.
However, there are problems with paying this way.
Invariably, some deals will fall through. If the sales
representative has already received the commission, it will have to be backed
out.
This creates a volatile situation, where representatives swing
from elation at getting a signed contract to being disgruntled when the
commission is withdrawn. There is a tendency for them to see it as a takeaway—they
may feel they have done their job and should be paid anyway. It can be
particularly messy to back out if that sale pushed the representative over
quota or up to a higher commission level. Another problem is that paying when
the sale is made can reward the wrong behavior. If sales people are paid for
simply getting signed contracts, they may not be as careful as they could be
about who they sell to.
In addition, companies can't pay sales people as much as they
could otherwise, because they have to take a fall-through ratio into account
when designing commissions.
Finally, if the market softens and the firm can't collect on a
number of accounts at the same time, cash flow problems can put the company out
of business.
The best—and safest—approach is to pay when cash is
received. It rewards the right behaviors and avoids all the problems associated
with paying when the sale is made. For those companies that want to provide an
instant reward for their sales force, it is possible to design plans so that a
bonus is paid when the contract is signed while the bulk of the commission is
held back until the company has been paid.
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