Most sales representatives prefer to be paid monthly. They don’t want to give their employer a free loan for an entire quarter. Getting paid monthly also helps them pay their bills. This is especially true if their base salary isn’t sufficient to cover daily expenses. At the same time, paying commissions quarterly presents some unique benefits.
Easier to manage
A quarterly schedule makes it easier to set quotas correctly. Using a short 1 month observation window, fluctuations are more common. Monthly revenue is more easily impacted by seasonal variations (ex: December is often a slow month), or random fluctuations due to chance (ex: a mega deal or refund). For those reasons, a monthly payment schedule increases the chance of miscalculating quotas. This can result in a frustrated sales force, or in over-payment of commissions. Finally, having to adjust quotas every month is not just more painful, it also needs to be done 4 times more frequently than quarterly, which can result in some administrative overhead (configuration, communication, verification, etc.).
Easier to understand
A quarterly schedule makes it easier to pay commissions only after a deal has been paid in full (versus simply won). Using a monthly payment schedule, there can be a significant lag between the time a deal was won, and when its corresponding commission was paid. For example, if a sales representative won a deal in January, and the customer paid in March, this sales representative would have received 2 monthly commission statements in between. The earned commission will therefore feel more disconnected from the sales than using a quarterly schedule, where deals and their corresponding commissions are more likely to be part of the same statement.
Potential cost savings
Using quarter-based quotas, most sales representatives will fail to reach sales objectives if they quit a month or two into the quarter. Therefore, a quarterly schedule makes it possible for organizations not to pay sales commissions when representatives leave in the middle of a quarter. In other words, assuming departures happen at random, a quarter-based schedule results in a lower spend than a month-based schedule. Also, using a quarterly schedule makes it easier to monitor true sales performance. Month-to-month revenue can fall victim to random variations, which makes measuring true sales performance more difficult. Finally, a quarter-based schedule makes it easier for HR to plan hiring because sales representatives are more likely to leave at the end of a quarter, once they’ve received their commission statement.
So which approach makes the most sense to your business? Assuming your sales force can tolerate longer payment cycles (ex: their base salary is high enough to pay their bills), a quarterly schedule could make sense. You also have the option to use multiple incentive plans or SPIFFs to combine both approaches. In the end, you should try to measure the true cost of your sales commission program for each schedule – including administrative costs. Regardless of schedule, your best bet is to use automation – it will provide the agility needed to evaluate and make changes to your sales incentive program.