If you’re responsible for, or involved with your company’s sales incentive plan (SIP), then you’re used to dealing with issues like whether the plan is properly aligned with the company’s strategy, or whether it’s driving the right behaviors. You’re also on top of the financial aspects of the plan – modelling, budgeting, accruals and monitoring how the plan is actually performing. But are you aware of the way in which new accounting rules impact your SIP plan?
For example, how would your salesforce react if, for purposes of your SIP, a sale was recognized only at the date of payment rather than under the current design that records it as it’s billed? That could be a huge change to the dynamics of your SIP – and it’s similar to the type of change that could result if you don’t get involved with understanding the impact of this change. Changes to your SIP definitions or design may be required for some, but not all companies. It will depend on how your finance department and legal teams decide to implement this change from an accounting perspective.
What’s the update all about?
The situation stems from changes being made to harmonize the way in which revenue is recognized. Historically, the rules differed under FASB (Financial Accounting Standards Board) vs. IASB (International Accounting Standards Board) approaches. Starting in 2018, the rules will now be the same under both systems.
How are the rules changing?
At a high level, revenue must now be recognized at the time when performance obligations are fulfilled, which may not necessarily coincide with booking, billing, invoicing or even payment. We won’t attempt to get into the technical details here, and even a glance at the ASC 606 (the FASB directive) or IFRS 15 (the IASB directive) may not provide enough information. We strongly recommend you reach out to your finance team to have them walk you through how the changes will impact your company.
So how will the changes impact sales incentive plans?
The key consideration is whether you currently credit sales based on recognized revenue. If so, then the timing of your revenue recognition may change under the new rules. If it does, then you need to consider whether it’s appropriate to continue to credit sales at the time of revenue recognition. If you decide to no longer link sales to recognized revenue, you need to understand how much of a lag this may create between credited sales and recognized revenue, and the potential impact on your financials (to the extent that you’re incurring sales compensation costs in advance of recognizing the revenue).
If, however, it makes sense for you to use the new definition of recognized revenue for your SIP, you may need to change the way sales goals are set because some sales credit may now be deferred until a future point in time. This means for any given sale, sales credit may be lower in the short term but higher in the long term. It may also create an ongoing annuity stream of sales credit over multiple years where one didn’t previously exist. If you don’t change the way sales goals are set, it could become more difficult to achieve near-term goals, but easier to reach long-term goals. This could lead to motivational challenges in the near term, and potentially negative cost impacts in the long term.
Lastly, if your current plan doesn’t pay for recognized revenue today, it may still be impacted. For example, many plans define sales credit as ‘invoiced’ revenue, which is essentially a proxy for recognized revenue. If you want to continue to pay for recognized revenue, but don’t change the definition in the plan from invoiced revenue, you could inadvertently end up with a disconnect between the timing of sales credit and recognized revenue.
Be in-the-know and get involved
These are just a few of the more obvious examples of how these accounting changes may or may not impact your SIP. It’s critical to understand the changes and insert yourself into the process to help ensure your SIP continues to make sound financial sense, motivates the right behaviors and aligns with your organization’s strategic priorities.
Ron Burke is a director in Willis Towers Watson’s Sales Effectiveness and Rewards practice. He has over 20 years of sales management consulting experience that includes a significant amount of work on the design and implementation of high-impact sales rewards programs. Ron works extensively on complex global and regional assignments.
Sven Huber is a senior consultant in the Sales Effectiveness and Rewards practice of the Frankfurt office of Willis Towers Watson. He specializes in the development, optimization and implementation of incentive systems and bonus models for the sales function and other employee groups; he has particular expertise working with key performance indicators.