Paying Commissions: Is shifting to monthly vs quarterly worth it?

When creating sales incentive plans, a common question brought up is shifting the timing of payments.  An organization maybe paying sales incentives quarterly, but have the desire to shift to monthly payments.  The main driver behind this is to drive sales earlier on in the quarter.  Now this may seem like a reasonable solution to the challenge of the hockey stick graph most of us see in sales.  However, will it lead to the results we desire?  Well, there are two things you may want to consider.

• Administration
• Company factors

Many times, companies desire to make commission payments to their employees right away, which is a good thing.  However, they need to consider the administration of the plans, there is a commission calculation process that needs to happen before payments are made.  During plan design, if you structure a plan that is overly complicated it will affect commission administration.  The employee processing commission payments may need more time to process, and if you hold them to an earlier deadline then errors may arise (which may be costly to the company and may frustrate the sales team).  Sales employees will get paid sooner, but there maybe payment errors due to the complexity and time limitation of processing.  Therefore, its always best to keep plans simple, or you may have to add more headcount for commission processing.  Now, you may have an ICM tool to process payments for you, but many of these tools have limitations when it comes to plan complexity. 

There are also certain types of plans, e.g., MBO’s that are typically measured quarterly, i.e., you cannot determine the monthly payment because the objective takes on average 3 months to complete.  Consequently, before you switch everyone to monthly payments, look at their plans to determine if the monthly payment schedule makes sense.  Also, if you’re going to start paying monthly, make sure you have the bandwidth and tools necessary to actually implement the change for the commission administration team. 

Now let’s assume you have successfully shifted your payments over to monthly, and you look at your sales month over month in quarter.  You would expect to see sales even out in the quarter because the salesperson gets the payment quicker.  However, you may see that sales slightly increase in month 1 or month 2, but still the highest sales volume is in month 3.  Why is this?  Well, this goes back to overall company factors, such as reporting, promotions, incentives and seasonality.  If everything in the company circles around quarterly goals, then a salesperson may not have the incentive to achieve results monthly or there maybe items outside of the salesperson's control.  Take for example SPIFFs, if you have all of your SPIFFs linked to quarterly achievement, then the drive to complete monthly sales is not as attractive.  Also consider your customer promotions, if you offer discounts to your prospects at the end of the quarter then more than likely the prospect will be inclined to buy later on in the quarter.  What about seasonality?  Based on the nature of your business this may also affect sales timing.  

Sales performance is not solely tied to the sales comp plan.  Paying monthly may shift sales slightly within a quarter, but other items play a role in sales results.  In general, its best to pay as close to the event as possible, but you may not see the results you desire because of other factors.

If you are going to do the payment shift then its great news for your sales team.  To set expectations, be sure to let them know the impact and timing.  That is, what do they need to do to make sure they get paid the next month (qualifiers & deadlines), when can they expect to receive their first payment, and what sales will be included in that first payment (time period), etc.  This will help in the transition and reduce confusion, last thing a company should do is introduce confusion with something that is good news.  This can happen when a company rushes to implement something without proper communication. 

If the shift to monthly is designed for next year’s plan, then include the sales payment terms in the sales compensation plan and plan rollout.  In the end, shifting from quarterly to monthly payments is worth it, but should be done in a way that is scalable and makes sense.

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