If you work with sales, payroll, or finance, you may have noticed significant efforts around crediting. For this blog post, we shifted our focus to Europe and asked Valeria Sens about crediting mechanisms used to reward the sales force. Valeria has extensive experience around sales compensation design, modeling, and training in the enterprise. Here is what we’ve learned.
Crediting is an attribution process used to calculate sales commissions. When a sales representative is credited with a transaction (ex: order, deal, etc.), this person (or his/her team) is recognized as a stakeholder for the sale. In an incentive system where sales quotas are expressed in terms of credits, commissions are calculated based on the amount of credits earned within the commission period. Before calculating commissions, the amount of credits needs to be determined precisely. In some cases, this requires calculating, for each sales transaction, an annual contract value (ACV) – a measure of value based on recurring revenue and one-time fees, normalized to a yearly revenue.
To calculate credits correctly, it’s important to first determine which sales transactions qualify. If a sales transaction falls outside an incentive plan’s period, it should not be taken into consideration. Also, there should be a clear agreement about which events in the sales cycle makes a sales transaction valid for crediting. To qualify, transactions may need to be in a certain state such as “won” or “paid”. Whether to credit representatives for sales which haven’t yet been paid is an important business decision. On the one hand, crediting representatives as soon as a deal is considered “won” makes sense if the sales cycle is very long and collecting funds could take months. On the other hand, this approach can cause issues if a customer requests a refund and the representative has left, while making it harder to convince representatives to help collect payment. Finally, for some roles (such as business development or marketing), crediting can happen before a sale is even concluded – for example, when a lead is sourced, qualified, or converted.
Crediting can appear simple but gets more complicated once you consider implementation details. For example, it could be that the entire revenue should not be taken into consideration because the sales transaction is a renewal or is recurring. In this case, it could make sense to only credit some incremental value, not the whole amount. Also, crediting must handle scenarios such as refunds or returns. For example, it could make sense to further penalize refunds (ex: 1 dollar in refund is worth minus 2 dollars in credits). Finally, some organizations may want to adjust crediting rules based on the type of product sold. Crediting can then help representatives prioritize sales activities around more profitable product lines. Some scenarios may also require special handling, such as calculating credits when a customer does not renew a particular product but purchases another.
Collective efforts and long-term contracts
Some organizations may need to implement additional crediting rules if sales require collective efforts. For this reason, it may be necessary to split credits between members of a team. At times, it can be difficult to determine the true contribution of every member of the team to ensure crediting is correct. Some sales initiatives require supporting roles (such as an account manager), and the level of involvement can vary from deal to deal. Also, another factor is renewals or long-term contracts. For example, if a contract spans 5 years, should the last year be credited the same amount as the first year? At this point, the contract is more in maintenance mode, so a lower crediting amount could make sense.
Crediting hierarchy & double-crediting
In some organizations, managers must be credited based on their reporting hierarchy as they have team-based quotas. Similarly, a parent territory may need to receive credits from all its child territories (in a cascading manner). In other organizations, the credited entity may be different from the actual salesperson. For example, representatives may need be credited for sales won by their interns, because they are acting as mentors and interns do not qualify for commissions. An important precaution to take when credits flow from person to person (or from territory to territory) is to prevent double-crediting. For example, if commissions represent 10% of revenue, a given transaction’s full credit should not be assigned to multiple parties due to hierarchies or roll-ups. Manual audits can help ensure to ensure no-one is credited more than 100% of each transaction’s value.
At first glance, crediting looks simple. In reality, a correct implementation requires some careful analysis. Do you have any challenge with crediting – or are you curious about which parameters to take into consideration when designing crediting rules? Reach out to Valeria on her LinkedIn profile, or contact us using this web page.