Enterprise Automation Tools: Commissions Calculation System Checklist

Posted by Gerry Poe


commissions system checklistThe Purpose for Commissions Automation is process costs and error reduction in sales commission calculations
Commissions calculations in Excel and other hybrid systems introduces a tremendous amount of time and potential errors into the calculation. With a structured commissions system you can reduce the number of errors in commissions and consequently save your company a lot of money.

Some first thoughts on commissions: revenues and ptofits, sales by sales reps, accounts payable, accounts receivable, commissionable stock items, commission percentage and tier structure, integration to your enterprise accounting software system, SYSPRO ERP.

Pay Commissions on time

Manual processes to calculate sales commission can take significant amounts of time and payments can sometimes be thirty or more days late. This causes reconciliation issues and dissatisfaction among the salespeople. An automated, ERP integrated, sales commission system can allow calculation of payments as quickly as you want. Calculations can even be done during the period to estimate potential payments and for accruals.

Complex Commissions Plans

Sometimes commission plans that suit the needs of the business may not be implemented because of the difficulty of establishing the plan and administering them. A ERP Integrated Commission System allows the establishment of complex plans and eases the administration.

Clear communication

An ERP Integrated Commission System maintains all the data involved in calculating commissions. This allows the production of clear and complete commission statements to the field. More transparent communication means less confusion among the salespeople and less queries and problem solving effort regarding commission issues.

Complete Reporting Capability

With all transactions and calculations stored in the system, ERP Integrated Commission System allows the ability to report comprehensively on sales commission information. An analytical component allows the user to slice and dice the information available in ERP Integrated ERP Integrated Commission System in various ways. Additional reports can be easily created from the basic system.

Commissions operate as standalone

ERP Integrated Commission System can operate standalone without reliance on other systems. ERP Integrated Commission System can be used in conjunction with any other systems as long as the data can be imported or keyed into the ERP Integrated Commission System application.

Track Sales, Commissions and Bonus

ERP Integrated Commission System allows the loading of all sales and other performance data. Sales information can be tracked using ERP Integrated Commission System. In addition commissions and bonuses can be tracked independently for the full plan duration. Tracking sales and performance allows management to clearly identify good and poor performers whether in the products/services or among the sales people.

Reduce Administrative Time and Effort

Due to the reduction in errors, the automated nature of calculations, data integration, clear reporting, Computer Administrators can expect to reduce the effort required to calculate and pay commissions significantly.

Reduce Administrative and Overpayment Costs

Savings of time spent in administering the compensation plans and resolving issues can help in reducing administrative costs. Errors in sales commission calculation favoring salespeople typically does not get reported, whereas errors favoring the company gets reported typically. Accurate calculations can save the company significant expenses in over payment of commissions.

Increased trust and morale

Having been burned by inaccurate calculations the salespeople usually distrust the commission calculation process. The automation of the calculation process, with access to all the data, clear reporting of any calculation allows the salespeople to develop trust in the process and increase their morale.

Increase Productivity

With salespeople not engaging in ‘shadow accounting’ of their commission statements, they are more likely to focus on selling activities with potential increases in revenue to the company. With reduction of the administrative effort, comp administrators can spend more time on value added work rather than purely administrative tasks

Sales Commission Plan

This is the crucial underpinning of the sales commission program. The plan is in essence the agreement between the company and the employee as to the performance expected of the employee and the compensation for the performance at varying levels. This is generally put down in document form and provided to the sales people. When hiring a new employee this is one of the items that the employee and company may negotiate.

This document generally includes information regarding the duration of the Sales Commission Plan and actions that the company and sales-rep are responsible for in the case of events such as employee termination/transfer, etc. This is an important document and should be created with the goal of clearly communicating the plan purpose. It should have clear information on the goals, the calculation logic with examples and activities to be done in the case of exceptional situations.

Performance Measure

This identifies the performance that the company is interested in measuring as it relates to the specific salesperson. For example, the company maybe interested in measuring ‘Total Revenue” brought in by a sales person, but maybe interested in “Gross Profit” of total revenue brought in by another sales person.

Goal

A Goal (aka Quota) is the target that the salesperson is expected to achieve in a certain period for a specific performance measure. Typically it would be expressed as something like “$250,000 Quota for Total Revenue in First Quarter of 2003”. Quota as a term is typically oriented towards sales (financial) performance. Goal is a more generic term for Quota and includes targets for other performance measures (e.g. Goal to achieve Customer Satisfaction of 90% in year 2003). Goals are set at a particular frequency within the plan duration, such as Monthly, Quarterly, Half-yearly and Annual.

Transactions

Data that provide information on the performance achieved by the salesperson is typically available to the calculation process as transactions. Transaction can be of different types: some plans incent based on Sales orders, other plans incent by Invoices, or Payments or completion of service, etc. These transactions have to be processed and compared to the Goals as a first step to calculating commissions. Commissions can be calculated against transactions individually at different rates or they can be cumulated for a period and calculated together at a single rate.

Attainment

Attainment indicates the achievement of the salesrep against a certain quota for a certain performance measure. Transactions are typically added up to arrive at a attainment total (e.g. Attained Sales of $200,000 this month on a Quota of $250,000). The comparison of Attainment to Quota can be expressed as a percentage as well (e.g. Attainment percent of 80% this month on a Quota of $250,000).

Commission

Commission is a form of incentive payment. This is a very common method of payment for sales people. It is typically paid as a direct portion of incoming revenue or margin. It is typically represented as a percentage of revenue or margin. Commissions can be paid against individual transactions such as orders or paid as a portion of total transactions for a period. Commissions are paid as frequently as possible in a plan year and typically are paid once monthly. An example commission could be "Pay 5% of all Sales Revenue to Salesperson A on a monthly basis."

Bonus

Bonus is a form of incentive payment. This is a very common method of payment for sales people and managers. It is typically paid against total performance for a period. It can be totaled together for a geographic region, business unit, etc. The performance can be for various measures such as sales, units sold, customer satisfaction, etc. Bonuses are paid for longer periods typically; it is common to have quarterly and annual bonuses. An example commission could be "If Units sold is more than 10,000 for Region A, then pay Regional Manager a $5,000 bonus).

Commission Rate

Commission rate is the portion of transactions (such as orders) that are to be paid to the sales rep. This is typically expressed as a percentage. An example commission rate could be "Pay 5% of all Sales Revenue to Salesperson A on a monthly basis", where 5% is the commission rate.

Commission Tiers

Are your commission rates sometimes variable based on attainment against a goal for a particular performance? If there are multiple rates, then they can be referred to as Commission Tiers. An example Commission Tier could be "For achievement of Sales Revenue against goal, pay sales rep a portion of Sales Revenue at the following rates on achieving the following tiers-"

Attainment %

< 100%

101% - 150%

151% and above

Rate %

5%

7%

10%

Draw

Draw is basically an advance provided to the payee by your company to be recovered against future earnings. Draw is typically used to make sure that a salesperson is provided a minimum amount of money per month and is used normally for the first few months after the salesperson has joined the company. Draws are typically recovered month to month. Sometimes draws can be forgiven at the end of the month. Draws that are not recoverable are also called Guarantees.

Cap

Cap is capping of the amount of money a payee can make in a particular period. It can be applied for a particular period, like a month, or for a full fiscal year. Sometimes capped amounts can be carried forward to future months.

Summary

Sales Commission is a complex process. Implementing commission solutions takes some effort. There are many reasons for this. Some possible reasons impacting implementation complexity are:

  • Integration data from Accounting/CRM datasources or Excel
  • Integration of data back to Payroll and Accounts Payable systems
  • Improper set up of source data to be able to integrate (e.g. Reps not specified, Costs not specified)
  • Paying both internal and external staff
  • Necessity of figuring out gross profit from sales, when cost data is not clearly available
  • Necessity of calculating commissions at one time (Invoicing) and holding on to pay at a different time (Cash receipt)
  • Necessity of loading past attainment into the system, when commissions rates and bonuses are based already processed data
  • Ability to cancel/claw back past paid commissions at the proper rate. Needing to have the past transactions loaded
  • Rolling up and providing overrides to other individuals
  • Many unique plans by groups and by individuals
  • Many exceptions to processing
  • Suggesting business process changes and implementation of these business process changes

Due to these complexities, providing integration to your ERP software is key to on-boarding, implementation and value to your company.  This takes care of getting you live on your commissions system. Your commissions program should include the following:

  • Analysis of Sales Organization Structure
  • Analysis of Company and Calendar
  • Analysis of Payees
  • Analysis and setup of data needs
  • Analysis and setup of Sales Organization Structure
  • Analysis and setup of Company and Calendar
  • Analysis and setup of Payees
  • Analysis and setup of data interfaces within ERP Integrated ERP Integrated Commission System
  • Analysis and setup of Plans and Incentives for each unique plan
  • Testing of the entire application over a fiscal period
  • Validating the results with the client
  • Implementing the software and database
  • Training on use of ERP Integrated ERP Integrated Commission System

Company responsibility

  • Providing source data for interfaces in the proper format
  • The quality of the source data
  • 100% availability of compensation administrator during the implementation period
  • Availability of other resources
  • Availability of hardware, software, network resources
  • Testing and verification of results and approval
  • User documentation of processes and procedures

Does your organization’s Enterprise Automation Tools include:

  • Commission Calculation System integrated to your ERP?
  • Internet access sharing with reps and sales force?
  • Sales calculations on time reporting and payments?
  • Commissions on paid invoices only or mixed?
  • Tiered commissions based on achievement, goals, price and profit?
  • Sales Commission reporting and anayltics?

These questions are but a few in the Complete Enterprise (ERP) Self Assessment which includes over 300 questions. You can download the complete ERP self assessment here:

Download the Checklist: The Complete Enterprise  (ERP) Self Assessment

Tags: Enterprise Automation

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