Taxes

Chapter 2 – Bonuses, Commissions, and the Unintended Benefits of Coin Operated Executives

  • 5 min Read
  • June 21, 2017

Author

Escalon

Table of Contents

The CFO was informed that several sales executives were paid the wrong commissions amounts for the first three quarters of the year. The payments will have to be made in the fourth quarter for an amount that was not projected nor recorded in the Company’s financial statements.

One of the best ways you can integrate yourself into your company is to administer its bonus and commission plans, which are notoriously difficult to negotiate and administer. Yes, they are the largest cost to a company other than basic payroll, or hardware costs if you are manufacturing a product. And yes, sales personnel and key executives on bonus plans don’t normally want to interact with back office personnel who administer these plans, mostly because they can’t be bothered. Yet, like Shakespearean lovers, employees compensated by variable compensation plans are tortured by a lack of continual feedback, and their curiosity is fed by not knowing results versus plan information in real time, turning it into an obsession.

A wily back office executive can use this to his or her advantage. Let us examine how you can benefit with the story of “The Coin Operated Sales VP.”

A peculiar aspect of corporations is that they are not single cohesive units, but instead composed of layers of hierarchies and teams, and these units often compete with each other for influence and resources. And while it may not be true that back office functions always stop at the end of these battles, they are never at the forefront of emphasis unless the Company is going public – and even then the priority lasts about ninety days, or until the Company receives its Sarbanes-Oxley merit badge. Yet, the people who negotiate, structure, or get paid under these incentive plans will always have power, especially the Vice President of Sales. As an administrator of these plans, you now have a motivated partner who will sponsor your compensation improvement projects. An experienced VP knows that a critical key to motivating his or her team is a well-structured incentive plan that is accurately calculated and reported in a timely manner.

Make no mistake, you need the Sales VP as a sponsor and ally when compensation plans are being structured. You may not be directly responsible for structuring or negotiating variable compensation plans, as Board members and C level VP’s are, but you can influence the process. Offer to poll other companies in your market for range of plans and percentages allocated to variable compensation. Share some of the common flaws in plan structure or in administration of plans to put some fear into your leadership. Tell them about your former employer who mistakenly overpaid its sales team by tens of millions of dollars due to a flaw in its overly complicated commission algorithm. Finally, tell them about the company that missed its profitability targets because the CEO agreed in an email to pay commission accelerators to the sales and engineering teams without informing the finance or HR teams.

Make the effort to explain how structuring good bonus and commission programs do not require intricate plans or complicated systems. Simpler is better. Use past examples of how complications resulted from executive or board interventions to manage behavior or attain a short-term result. Describe how these complications always lead to unforeseen consequences, followed by apologies about the unforeseen aspect of the consequences, then to another intervention to correct the secondary effects, leading to a cascade of “unforeseen” responses, each one more difficult to negotiate or predict than the next.

Ultimately, you will need the Sales VP working with you when you meet with members from the teams that have an input into your compensation processes. As mentioned in the payroll chapter, the goal of this extended meeting is to document current practices, assess the practices and decide on how to improve. This is when you most need a sponsor’s support and involvement. The concepts of Lean were initially met with resistance (it took ten years to implement Lean at Toyota). You need help from the top to get participants to meet and agree to change processes. A VP’s top down mandate, to accurately calculate and report her team’s bonus and commission in a timely manner, will give you the cover to make improvements that you need.

Self-interest is what drives a team to its administrator. By allowing the VP and members of the team a window into the end-to-end challenges that occur at each step in the process, you can demonstrate how approving maximum and minimum commission amounts as a percentage of total net sales will help them better forecast their costs. The team will understand how having everyone sign compensation plans before making payments from these plans will prevent team members from fighting over unclear targets or forgotten accelerators. They will become intimate with the coordination needed to input actual data into a standard commission table and publish it each month. And they will appreciate the effort that goes into updating quotas and making payments (to them) each quarter. That, at the end of the day, is and should be their constant target. For you, the target is building a process so efficient and effective that the only way to improve is to automate. Only when you have built an effective process that the customer trusts can you build a system that reduces your total cost to process variable compensation.

Talk to our team today to learn how Escalon can help take your company to the next level.

  • Expertise you can trust

    Our team is made up of seasoned professionals who bring years of industry experience to the table. You gain a trusted advisor who understands your business inside out.

  • Quality and consistency

    Say goodbye to the hassles of hiring, training and managing in-house finance teams. You will never have to worry about unexpected leave of absence or retraining new employees.

  • Scalability and Flexibility

    Whether you’re a small business or a global powerhouse, our solutions scale with your needs. We eliminate inefficiencies, reduce costs and help you focus on growing your business.

Contact Us Today!

Tap into the latest insights from experts in your industry

Accounting & Finance

Common Accounting Mistakes That Cost Medium-Sized Businesses Millions 

Accurate accounting is the bedrock of any successful business operation. Yet, medium-sized businesses—those that have grown beyond the small-business stage...

Read More
Taxes

1099 vs. W-2: How to Ensure Compliance and Reduce Risk 

Distinguishing between independent contractors (1099) and employees (W-2) is a pivotal compliance matter for U.S. businesses. Misclassification can result in...

Read More
Accounting & Finance

Capital Raising in Spring: How to Position Your Startup for Investor Interest

Spring symbolizes renewal, making it an apt metaphor for startups aiming to secure fresh capital to fuel their next growth...

Read More
uncategorized

Spring Clean Your Payroll: Essential HR Best Practices for Scaling Startups

Payroll is more than just issuing paychecks—it’s a complex, high-stakes process that can significantly impact employee satisfaction, legal compliance, and...

Read More
Accounting & Finance

How to Leverage Q2 Financial Data to Drive Startup Growth in the Second Half of the Year

For startups seeking sustainable growth, every quarter provides a treasure trove of data—but Q2 data can be particularly revealing. By...

Read More
Accounting & Finance

Q2 Business Planning: Adjusting Your Financial Strategy for the Rest of the Year

By the time Q2 rolls around, many startups have a clearer picture of their performance and market positioning compared to...

Read More
People Management & HR

5 Key HR Challenges to Address Before Summer to Keep Your Team Engaged

For many startups, the summer months can be a dual-edged sword. On one hand, warmer weather and looming vacations can...

Read More
Taxes

How to Maximize Your Tax Deductions: Essential Tips for Startups in Q2

Tax season often triggers stress and complexity—especially for startups laser-focused on building products, acquiring customers, and scaling operations. Yet savvy...

Read More
Startups

Mid-Year Financial Checkup: How to Assess and Adjust Your Startup’s Budget 

The halfway mark of any given year is more than just a date on the calendar; it’s a valuable checkpoint...

Read More