One day your manager came to you out of the blue, gave you a pat on the shoulder, and said you did a good job.
Well such a scenario for most of us is cloud nine.
Then, think about the situation where they give you a bonus for your “good job!”
If there is a level called Cloud Ten, you would be beyond that!
These unexpected, untimely recognitions and rewards are sure to have a huge positive impact on a good employee.
By good employee, I don't mean the high performers alone. They might also be your average performer but who is disciplined, committed, dedicated, and loyal.
This bonus a manager gives you based on their decision and choice is called a discretionary bonus.
In this blog, we will walk you through everything about this bonus, from its meaning to the difference between non-discretionary bonuses and its different types of incentive pay.
We will look into how to create a discretionary bonus plan, its implementation process and even the legal and ethical part about it.
So don’t waste much time and let's scroll down.
Bonus that employees receive at the employer's subjective wish or discretion is called a discretionary bonus.
There are no predefined criteria or milestone achievements to be met to receive this bonus. It is simply your employer’s judgment to recognize the employee or as a gesture of goodwill.
It is usually received when the employee is least expecting such a reward. The irregular timings and unanticipated receiving make the discretionary bonus all the more endearing.
Discretionary and non-discretionary bonuses are poles apart in their criteria, timings, purpose, and many more.
A discretionary bonus has no predefined criteria and solely falls on the employer's decision. It rewards an employee’s performance, loyalty, or goodwill at a time when they least expect such recognition.
As it solely is the employer’s decision, discretionary bonus plans are not documented and vary depending on the employee or situation.
A non-discretionary bonus is your typical incentive bonus that is strictly laidown in the contract. It follows a set criteria for eligibility, and a scheduled timing of payment and has the purpose of enhancing employee motivation and performance.
Employees what they need to achieve to receive the bonus and expect a fixed amount at a specific period of the year.
These distinctions help in understanding how each bonus can be utilized to its best use within the organization.
Some employees take the extra mile. They are ready to put in some extra hours, take up some extra tasks without any complaint, and just see the company as their own.
These employees deserve that extra recognition for their selfless dedication and loyalty.
Here are a few discretionary bonus examples for employers to reward those star employees and recognize their dedication and hard work:
Performance bonuses: To recognize the selfless dedication to go beyond the normal duties.
Spot bonuses: Awarded spontaneously to recognize an exceptional employee or their performance.
Holiday bonuses: Awarded around the holiday season as a gesture of goodwill.
Retention bonuses: Given to key employees to stay with the company during the company’s critical period or transitions.
Referral bonuses: Rewards an employee who refers to a candidate who later gets hired and proves their grit.
Attendance bonuses: Awarded to employees who maintain exemplary attendance records.
Customer Service bonuses: Given to employees who go above and beyond in their customer interactions to provide outstanding customer service.
These examples might not be for your typical high-performing employees.
At times, discretionary compensation recognizes and rewards those employees who do more than expected all because that is what they are and that is how they like to get it done.
In doing so, they enhance your overall work culture, brand identity, and business operations.
The decision to award discretionary bonuses rests solely with the employer. It is their sudden and spontaneous decision.
This means it's inherently flexible.
For this reason, most often discretionary bonuses don’t actually have a plan.
Though it's not strictly necessary to create a formal roadmap on how to go about with your discretionary incentive plan, having one is always an advantage.
So here are a few tips to create an effective discretionary bonus plan
Discretionary bonus needs a separate allocation so that it doesn’t tamper with the more structured incentive program. This ensures that employers have the opportunity to reward deserving employees without any financial strain.
Discretionary bonus is not a clearly documented expense as it solely is the employer's decision to pay a lump sum amount to the employee. However, keep track of how the money allocated for discretionary bonuses is utilized.
Sometimes employers can make the wrong judgment or can be biased. This leads to certain employees receiving rewards while the deserving ones remain hidden in the cloud of favoritism.
Proper tracking of the utilization of the budget and the recognition of the right employee is required. Only such strict monitoring can ensure the purpose of discretionary bonuses is met.
Even when a tool has no structured way, building your own structure and system will be useful to ensure that the purpose for which it was actually meant is fulfilled.
Discretionary bonus is an employer's recognition of what they consider to be your achievement.
It solely rests on them the amount you will receive and the time of payment.
However, to make the implementation of discretionary bonuses effective a step-by-step process will be useful.
First, declare the bonus. Managers must clearly communicate the bonus decision, the amount, and the specific achievement for the reward.
Second, ensure timely payment. Companies must make timely and prompt payments at the next payroll cycle to honor the employee’s commitment.
Third, document the process. To maintain transparency of the discretionary bonus, record the details of the bonus decision and payment.
Fourth, clearly communicate. Inform employees about the particulars of the bonuses and how it works though it's a subjective surprise.
Following these steps in your implementation will enhance the effectiveness of discretionary compensation.
It makes the reward valuable to the employee and helps the rest of the team understand its significance.
All employees like to be recognized for the work we do.
Sometimes they are not the smartest in the room, they might not be the best performer or even the top achiever.
At times, they are the average employee who is punctual at the office, disciplined about their tasks, and a good team player who enhances the work culture.
Employers must strike a balance between acknowledging the efforts of their high-performing employees and not overlooking the efforts of others.
It is for this reason and more that most employers make the best use of discretionary bonuses.
The perks of acknowledging your employees go a long way.
It can positively impact your employees, operations, and company.
Discretionary bonus is a subjective and flexible incentive.
An individual decides if an employee deserves recognition and reward based on their personal judgment.
Since it is based on personal decisions there needs a legal and ethical check to prevent any discrimination or violation.
From a legal point of view, companies must ensure that these discretionary bonuses comply with anti-discriminatory laws.
There needs to be a check that no individual receives extra payment based on any bias. That there is no discrimination based on race, gender, religion, caste, disability, or any other factor.
In addition, companies must ensure these bonuses are reported under the respective tax laws.
By adhering to these legalities, companies also demonstrate their ethical standpoint in their incentive structure.
That their discretionary decisions are fair, transparent, and devoid of any favoritism. By making objective decisions in a subjective incentive program, companies also prove their integrity, values, and corporate culture.
The innate subjectivity of discretionary bonuses puts a legal and ethical bind on companies to be extra cautious of their decisions.
It is repeatedly emphasized throughout this blog that discretionary bonuses are subjective, that a single person takes the decision etc etc.
And yes, it has a lot of perks for your employees. It improves their engagement, motivation, retention etc etc.
But here is a thing! If you don't include some checks and trials, other employees might feel left out, start doubting the program is biased, and have the opposite effect than what was intended.
So here are a few best practices to help you hit the target right:
Building a cross-and-check process even to a subjective incentive as discretionary compensation will only enhance its effectiveness.
Following these best practices will help you enjoy the perks of discretionary bonuses without falling into the pitfalls of mismanagement and unfair distribution.
What makes some managers or employers stand out in the crowd is their leadership skills.
They appreciate the potential of their teammates, give credit for their efforts, and reward them timely.
For such managers, discretionary plans are a great boon. For they do not have to wait for the incentive program schedule, performance metrics analysis or any such things to reward their teammates.
They make use of their discretionary bonus budget to give the most deserving employee recognition.
Just like any other incentive reward, the discretionary bonus also fulfills similar purposes.
Employee motivation, enhanced performance, increased engagement, loyalty, and retention.
However, knowing that it was your employer’s personal decision to choose you for this bonus makes it all the more special. Like a hand-picked candidate for a special occasion.
Despite these feel-good aspects of discretionary bonuses, care must be taken not to succumb to any bias or favoritism. Such a scenario can ruin the overall purpose of the compensation.
To read more about effective compensation programs, visit https://www.kennect.io/.
To know how automation enhances your effective compensation programs, Book A Demo with US.
Without a doubt, what attracts most candidates to your company is the pay that you provide.
Everyone is looking for a fair, competitive, and high salary. It is what attracts them. It is what retains them. It is what motivates them.
At all times, companies need to maintain that competitive advantage as well.
This means you need to regularly conduct compensation analysis to know about the external trends and internal performance.
In this article, we will explain what compensation analysis is, its importance, steps to create effective compensation analysis, and best practices to optimize it.
So, let's begin the reading. Scroll down.
Compensation analysis refers to reviewing and comparing an organization’s pay structure and practices. This ensures that their compensation is competitive and fair, follows the labor policies, and is on par with the market conditions.
The goal of conducting regular compensation analysis is to attract, retain, and motivate your workforce. In addition, it helps organizations to maintain cost-effective compensation practices while complying with required legal standards.
Keeping a close watch on your pay balance sheet fulfills a lot of purposes for the organization. These include:
Compensation analysis is a critical tool in your business operations.
Only by keeping a check that you offer a fair, competitive, and legally compliant pay structure can you align employee well-being and organizational success.
Compensation analysis plays a huge role in optimizing your overall business operations.
Since it plays such an important role, enhancing it with some best practices will help boost the desired results.
So here are a few ways to improve your compensation analysis with some best practices.
Always keep a regular check on your market data to ensure compensation levels remain competitive and relevant.
When collecting market data and competitor standards only rely on reputable sources.
Your compensation analysis report must not just focus on base salary. Analyzing variable pay including bonuses, commissions, and other incentives helps get a better picture.
Clearly communicate the compensation structure to employees. This will help build a better understanding of the pay structure and trust in the organization.
Review your internal pay structure between colleagues, roles, and departments. This helps ensure fairness and consistency across the organization.
The agenda behind the compensation analysis report is to get as many insights as possible. Including HRs, finance, and even the employees will get in gathering diverse perspectives.
Compare your compensation with competitors and similar organizations. This will help understand your position and relevance in the market competition.
Each compensation analysis must be a push to make the relevant changes and adjustments. This will help you respond to the appropriate market trends and economic conditions.
Include compensation management software like Kennect to streamline data collection, make accurate analyses, and create comprehensible reposts.
Incorporating these best practices as a part of your compensation analysis will help enhance the desired result.
Compensation analysis must be made a routine part of your business management.
But diving into it without preparation won't be effective. There needs to be a step-by-step approach, a system of doing it. In short, you need a compensation analysis template.
So here is a step-by-step process to help ensure no stone is left unturned in the analysis:
Gather up-to-date data on the current salaries, incentives, benefits, and other components. This will lay down a solid foundation for analysis.
Look into the industry compensation trends and identify your competitor's standards. This will help in analyzing your compensation position, its relevance, and identity areas of over and underpaying.
Thoroughly scrutinize the pay across similar roles and departments within the organization. This helps ensure fairness and address discrepancies based on gender or racial pay gaps.
Take into consideration all factors that make the compensation structure- base salary, variable pay, other incentives, and benefits. This helps gain an overall picture of your pay structure and its competitiveness.
Based on analysis, develop actionable plans to improve your salaries, benefits, and other compensation components. These implementations must be clearly communicated with the employees and managers to enhance their overall effectiveness.
Select a suitable sales compensation analytics software to streamline your data management, analysis, and reporting. Find solutions that provide a wide variety of features without compromising on data security and privacy.
Post implementation, keep a regular review of your compensation routine and practices. Be open to updates and changes depending on the market trends and dynamics to maintain relevance and competitiveness.
Compensation analysis must be a routine part of your business operations. Having a systematic and regular approach helps ensure the fairness, competitiveness, and relevance of your compensation strategy.
The agenda of compensation analysis is to ensure the fairness, competitiveness, and relevance of your pay structure.
This means it must be a part of your routine business operations.
However, the frequency of it is also subjective depending on each company and their operations.
Companies can follow any of these timings. But the point is to conduct regular and timely compensation analysis to reap the benefits of it.
Compensation analysis plays a significant role in improving employee retention.
It conducts an in-depth analysis of each and every aspect of compensation- including individual salaries, pay structure based on role, responsibility, position, departments, base salary, variable pay, benefits, and much more.
This thorough analysis helps identify gaps in your employee compensation, understand employee expectations based on competitor and market trends, and outline actionable plans.
Companies realize that:
🟩They need to ensure competitive pay
🟩They need to enhance pay equity
🟩They need to recognize and reward performance
🟩They need to provide comprehensive benefits
🟩They need to cater to career development
🟩They need to address pay disparities
🟩They need to adapt to changing needs.
Following up on these inputs will thus help improve employee work-life balance.
When employee work-life balance improves, it enhances their morale and satisfaction. When their morale and satisfaction are enhanced, the retention rate also increases.
We all keep a tab of where our money is spent- to ensure we utilize it well and that no wastage happens.
It makes us feel that we are making a judicious use of our money.
Similarly, companies also keep track of their transactions to ensure their financial health.
Since a significant part of a company’s finances is directed to employee compensation, it is important to keep a close watch on it and study its performance.
This helps companies to stay competitive in the hiring market and attract top talents.
In ensuring fairness in the pay structure, companies can boost employee satisfaction and retain their top-performing employees.
These strategic initiatives to maintain fair and competitive compensation will build a committed workforce that drives your company to growth and success.
The way you compensate your employees defines who you are as a company.
Hence, you must offer fair, competitive, and market-standard compensation to your employees. It helps in employee hiring, retention, motivation, and many more.
And how do you come to know your compensation structure is good enough? Well, through a thorough compensation analysis.
This comprehensive approach toward enterprise compensation management will positively impact your overall operational performance and organizational growth.
But here is a tip: choose automation over manual when it comes to compensation analysis.
With automation, you can streamline data collection, management, and reporting of compensable factors with zero error.
Kennect supercharges your incentives with our cutting-edge solution. We automate your entire sales incentives process, saving you time and ensuring accuracy.
For more information, Book A Demo NOW!
How would you approach your work if you had the opportunity to earn unlimited money?
Your final pay of the month is determined by how well you perform, how many targets you achieve, and how you continue working till the last day of the month.
Well, you will be ready to give your absolute best.
The possibility of limitless earnings opens your limitless potential.
This is what uncapped commission does to your sales reps as well. You remove the cap on their variable earnings and offer them the possibility to keep hitting milestones. The magic begins.
In this article, we walk you through everything about uncapped commissions- their meaning, the difference between capped commissions, benefits, and drawbacks.
So let's not delay more and open the wide possibilities that uncapped commission offers.
Sky's the limit when it comes to uncapped commissions.
Uncapped commission refers to a compensation structure where there is no limit to the amount of commission a sales rep can earn. As long as they keep achieving their target and closing deals, they will receive incentives for it.
This type of commission structure is mostly suitable for incentivizing high performance and rewarding top sellers.
Uncapped commission structure is thus a powerful tool that drives sales and organizational growth.
If uncapped commission refers to earning of commission without any limit, capped commission regulates the commission amount a sales rep can earn in a particular period.
This distinction between having a limit and not having a limit on your commission brings differences in many areas of sales management.
Let's look at what aspects of differences come between capped and uncapped commission:
Capped and uncapped salaries have their own advantages and disadvantages.
Eventually, it falls on the company to make the final call. Depending on your financial capacity, commission budgeting, and resource allocation, an effective commission structure that suits your operations can be chosen.
Who doesn't like a limitless earning opportunity?
In fact, everyone will try to make the best use of such prospects.
So let's check what are the top 5 benefits of providing uncapped commission to your employees:
Uncapped sales commission allows unlimited earning potential based on your performance. This financial motivation will push high performers to make the best use of their skills.
When there is no earning ceiling, sales reps will be motivated to enhance their productivity and performance. This enhanced effort and performance will improve the overall sales.
High-performing sales reps will be inclined towards a commission structure without caps. It will help attract and retain motivated and ambitious salespeople in the company.
Uncapped commission structure ensures continuous sales efforts. These consistent efforts align with the larger company's strategy of achieving its goals and objectives.
The drive to maximize one's sales will encourage sales reps to develop new and innovative sales strategies that help close deals, achieve higher sales, and drive company growth.
Uncapped commission is a powerful sales compensation strategy.
When used strategically it boosts sales motivation, performance, and productivity and drives company growth and success.
Just like every rose has its thorns, uncapped commissions are also not without drawbacks.
Though the benefits make it a desirable commission structure, companies must be well aware of the risks it creates.
An uncapped commission structure can cause unpredictable and potentially large payouts. This can severely affect the company’s budgeting and financial resources.
Uncapped salaries are an overpromise to your employees. The offer of limitless earnings will motivate everyone.
But when a large commission payout comes, companies will not be in a position to make timely payments which can cause employee dissatisfaction.
The offer of unlimited commissions will make your sales reps short-sighted. They might be even compelled to take unethical actions to win the big lottery.
Uncapped commission might be a big win only for the high performers. This creates a difference in earnings among sales reps leading to team discontent.
In the rush to close as many deals as possible, sales reps might compromise on the quality of leads. It can so happen that most of these clients fall out after a few months of contract signing.
With the possibilities that uncapped commission offers, companies must also have a trial and check process where they ensure that employees have a healthy competitive turf.
Only by ensuring a healthy environment can the drawbacks of uncapped commissions be overcome.
There is nothing to be scared of in an uncapped commission structure.
However, you need to be well aware of the challenges that an uncapped commission will pose. Being better prepared to handle these bottlenecks will help you gain confidence and comfort in using the tool.
So what are the bases for fearing and being scared of an uncapped commission?
Now, having a strategic plan to handle these challenges will help you overcome the fear of uncapped commissions.
We fear what we don't understand. Similar is the case with uncapped commissions.
Simply offering a limitless commission to employees for enhanced motivation and performance won't make the deal.
You need to know how to apply these tools judiciously to make the best use of them. Knowing these terms and clauses will help you leverage its full potential.
Companies as a general practice do not include the offer of uncapped commissions in their job descriptions.
A primary reason for this decision is to not attract the wrong candidate.
When a job description offers the possibility of uncapped commission, there are high chances that candidates motivated by money and short-term goals will apply first. This leads to the ideal candidate being drowned in the crowd.
In case these wrong candidates get hired, they might not align with the company's values or vision. It can also happen that their idea of earning a high salary might not match the ground reality.
The job might require a great effort for market penetration, sales journey, and closing of deals. Winning on this turf might not be a breeze.
When these company demands and the candidate's expectations are not met, it can lead to disappointment and dissatisfaction. They might feel stressed and pressured and will feel the work environment is competitive.
To meet the required targets, candidates might take up unethical practices to close deals. This can create a great concern for the quality of work culture, team dynamics, and the company environment as a whole.
Not able to meet these expectations and requirements, eventually, these candidates will leave the job.
The company will be left with a high turnover rate, the recruitment cost will be futile and HR back to square one.
To avoid all this chaos, companies refrain from mentioning their commission structure in job descriptions and tend to point out that commission details are subject to company policy.
Uncapped commission structure can drive sales performance.
When applied under the right circumstances, it improves sales performance, enhances sales volumes, and increases the revenue of the company.
But, it's also important to balance it with proper incentive management. Otherwise, uncapped commission can take a downhill course causing unethical sales behavior, unhealthy sales competition, and ruin the work environment.
For this reason, companies must diversify their incentive program with other incentive examples - customer satisfaction bonuses, retention incentives, etc.
Restricting your sales commission program to just one commission structure is not a healthy practice.
The larger company choice must be towards choosing a hybrid commission structure that ensures better sales performance without compromising on the organizational values and culture.
To say in simple terms, capping commission is a safe and risk-free way of incentive management.
From company to customer management, capped commission promotes a healthy and sustainable practice. These goals are achieved without compromising on sales performance.
For all these reasons and more, companies choose to cap their commission structures.
Uncapped commission is not the be-all and end-all of commission structures. There are a wide variety of commission examples available out there.
Some of these alternative commissions include:
These commissions also offer the possibility of uncapped commission earnings to sales reps while focusing on various other evaluation metrics.
Uncapped commission offers your sales team the opportunity to earn according to their potential.
The limitless commission boosts their performance and enhances the closing of deals. However not addressing the negative effects like stress, pressure, unhealthy competition, and work environment can undermine its benefits.
But the larger demand for having an uncapped commission is tracking and monitoring the sales achievement and payout.
This is required to properly monitor the value of deals, manage large payouts, and efficiently manage the incentive program.
With a large sales force and uncapped commission examples, companies can feel overwhelmed. That is why an incentive automation solution is necessary.
With Kennect, you can supercharge your incentives. Our cutting-edge solution automates your entire sales incentives process, saving you time and ensuring accuracy.
To know more about our solution, Book A Demo NOW!
Here is the problem: your sales rep closed a deal in the first quarter. But the whole onboarding process finished in the second quarter. You paid the commission in the third quarter.
Now to which quarter does this expense fall?
Each company will have a distinct solution on how to handle this situation. And that is how things were before ASC 606 as well.
When ASC 606 was established, sales commissions got a more structured and uniform way of accounting in the financial statement.
So what changes happened in the capitalization of commission under ASC 606?
Let's read.
Capitalized commissions refer to the expense that the company incurs when onboarding a new customer or selling a product.
Instead of adding the whole amount as a single expense in the balance sheet, it is spread across the customer's life or contract validity period.
For example, a sales rep earns a commission of $1200 for acquiring a new customer. Instead of recording this amount as a single expense, it is distributed over the contract's validity.
If the validity of the contract is 12 months, the sales commission expense will be spread out as $100/ month for the duration of the contract.
This capitalized commissions recognition approach matches the expense of the commission with the revenue it helped generate over time.
Accounting Standards Codification 606 (ASC 606) is a revenue recognition standard set by the Financial Accounting Standards Board (FASB).
It draws a standardized framework for companies to record the money they make from selling products and services.
Enforcing a standard practice will ensure consistency among the revenue recognition practices of all companies in the same industry.
In addition, it provides clearer information about your revenue generation and financial health.
Previous to ASC 606, there were a lot of discrepancies in the way each company and each industry went about their revenue recognition.
In short, there was no uniformity at all.
These inconsistencies created a lot of confusion and complexities while evaluating the financial performance of companies, and tracking their revenue reporting to name a few.
To resolve these issues, the authorities implemented ASC 606. The result was:
The implementation of ASC 606 was a need of the hour. It brought consistency, uniformity, clarity, and transparency to financial reporting where it didn't exist before.
ASC 606 has revolutionized the accounting process.
It has drawn clear demarcations on how to go about with each specifics of accounting- giving it a proper structure and framework.
Here are the areas that ASC 606 has made an impact on your accounting process:
ASC 606 made it mandatory to specify the contract nature, the number of performance obligations, and the transaction price. This brings clarity and transparency.
Now businesses can recognize their revenue only when the promised product/service is completely transferred to the customer. Making revenue recognition timing streamlined.
ASC 606 brings standard practices to each industry. This helps investors and stakeholders to easily evaluate and compare financial performance and health.
ASC 606 has made clear and specific guidelines on handling contract changes and variable payments. This ensures accurate and transparent accounting of these factors.
At large, the ASC 606 impact can be read as bringing a proper structure to the erstwhile haphazard accounting and revenue recognition.
With the coming of this new guideline, businesses have improved the reliability, comparability, and transparency of their financial health and performance.
There is a way of revenue recognition you have been doing till now.
With the coming of ASC 606, you might feel that everything has been toppled and you have to start from scratch.
Since ASC 606 is legally binding, you must make updates in all relevant areas of your business.
So if you feel like you are back to square one, do not worry.
We have designed a step-by-step checklist to help you prepare for the requirements of ASC 606.
Begin by studying the basics. Understand the details of ASC 606 and how it differs from the previous revenue recognition standards.
Evaluate your current practices. Review your current revenue recognition practices to understand which areas will be impacted by the new standard.
Gather and review all your existing contracts. Work on including the required details like performance obligation and revenue streams to enhance transparency and clarity.
The previous practices of writing off the amount as a single expense. ASC 606 calls for amortization of expenses. You must learn about the specifics of determining your amortization period for accurate revenue recognition.
ASC 606 is altogether new for your accounting and finance team. Providing them required training and education to understand the changes and how they impacted their work.
There was an established process and tool that helped you manage your financial resources. With ASC 606 you need to update all these to adapt to the new requirements.
Your financial statements once contained the required information to go about with the traditional revenue recognition practices. With the implementation of ASC 606, there are additional columns to accommodate the newer requirements.
You need to implement a system where you consistently monitor changes happening in the revenue recognition practices. This will help in remaining updated as needed.
Revenue recognition will undergo changes on and off.
This means you need to keep an open ear on the updates happening. Only through ongoing monitoring can you ensure compliance with the new revenue recognition standards.
ASC 606 has had a significant impact on commission policy.
To begin with, it has brought changes in how companies recognize and report sales commissions in their financial statements.
Previous to ASC 606, the sales commission would be expenses entirely immediately after the sale was made.
With the new revenue recognition standards, the commission is first capitalized and then amortized, thereby matching cost with revenue.
Let’s break down this “capitalized”, “amortized” and “cost with revenue” into simpler parts.
Earlier sales commissions were marked as an expense immediately after the sale was made. Now under ASC 606, sales commissions are capitalized or recognized as an asset in the balance sheet.
Earlier, sales commissions were marked as a one-time expense on the balance sheet. Under ASC 606, this capitalized commissions cost is amortized or spread out over the length of the customer contract.
With these measures, the timing of the commission expense is matched with the revenue it helps to generate.
The new approach under ASC 606 thus provides a clearer picture of profitability and more accurate financial reporting.
It’s true that ASC 606 has paved a path for revenue recognition.
But that doesn't mean it's without challenges and potential risks.
There are areas that businesses need to keep a close eye on to manage effectively.
So what are these potential risks that are associated with implementing ASC 606:
ASC 606 standards come with a lot of complexity. Not understanding these clauses or misapplying them can result in inaccurate financial reporting and non-compliance.
Your existing financial systems need to be upgraded timely to meet the requirements of the current recognition practices. This can be a costly and time-consuming process that can disrupt your day-to-day operations.
ASC 606 required detailed data collection on contracts, performance obligations, revenue recognition, etc. Inadequate data collection can lead to errors in revenue recognition.
Your weak or outdated methods and measures for revenue recognition can lead to non-compliance with the new standards. Timely review and update of these internal methods will ensure accurate financial reporting.
The new revenue recognition rules can impact the existing financial metrics. Investors and stakeholders will feel concerned when changes in revenue, profitability, and cash flow metrics occur,
Though these challenges exist, it is not without solutions.
Learning more about the ASC 606 standards, being open to system updates, keeping your data management accurate, and having transparent communication can help overcome these challenges.
You are obliged to follow the standards lined up by ASC 606.
You have to boot up to adapt to its requirements and overcome the potential challenges.
But here is a piece of advice.
Including a few best practices can help you better cope with these new and changing rules and standards.
Here are the top five best practices that help you manage your accounts under ASC 606:
Maintain clear documentation of revenue recognition policies and procedures. This will help in keeping track that you align with ASC 606 guidelines.
Keeping updated with the ASC 606 guidelines can become tedious. Provide regular training sessions for the finance, accounting, and sales teams to help them understand the ASC 606 requirements.
ASC 606 has laid down strict guidelines on contracts with customers. Ensure you follow the five-step process and comply with the ASC 606 principles.
Accurate data collection means accurate revenue recognition. Implement systems that help capture and store data to comply with the ASC 606 requirements.
Establish and maintain a strong internal process to monitor your ASC 606 compliance. Conduct regular audits to ensure there are no discrepancies in revenue recognition.
Including these best practices as a part of your everyday revenue recognition process will help manage accounts under ASC 606.
There are many software solutions that can help with ASC 606 compliance.
Of it all, sales commission automation software will be a good solution to potentially assist you with ASC 606.
Here are a few ways, sales commission automation tools like Kennect help comply with ASC 606:
To begin with, automation software can accurately calculate capitalized commissions based on predefined rules and rates. This means it can be configured to align with commission structures required under ASC 606.
It can generate detailed reports and provide an audit trail of commission calculations and payments. This will be a good help in documenting compliance with ASC 606 requirements.
Many commission automation tools integrate with financial systems. This ensures that commission data is correctly reflected in financial statements prepared under ASC 606.
Some automation platforms offer flexibility to customize commission structures and rules. This will allow businesses to align their commission policies with ASC 606 guidelines effectively.
Now a sales commission automation tool can help you only to an extent. It can help you comply only with certain aspects of ASC 606.
This means, businesses must not compromise on their training and documentation part as no software is an absolute substitute for understanding the principles and requirements of the standard.
The future of sales compensation lies in automation.
We have reached a point where it is inevitable for businesses to walk away from sales comp automation tools.
The data visibility, accuracy in commission calculation, reduced administrative work, and real-time tracking of sales achievements only enhance its desirability.
When businesses stay away from investing in automation tools, what they don't realize is the undetected revenue leakage that happens because of a lack of digital solutions.
With data-driven decision-making becoming the vogue of the time, old-school business operations devoid of it will be scoffed at.
For businesses wishing to stay relevant and competent in their industry with a strong salesforce, then automation is what you need to endorse.
From an erstwhile autonomous way of doing things, revenue recognition has gone a long way in becoming standardized under ASC 606.
The biggest milestone happened in the accounting of sales commissions.
With the sales journey being long, the closing of deals happening at one point, and commission paid at another, the balance sheet looked haphazard.
The greatest of all these issues was that companies did this documentation in their way without any uniformity with others in the same industry.
All these led to further confusion and complexity.
With ASC 606, revenue recognition was brought under an umbrella. Companies belonging to the same industry started following similar practices and processes.
Though a lot has been made uniform, there is still complexity with the rules and clauses.
Incorporating automation tools can make these responsible and routine processes easy and streamlined.
Know more about how sales commission automation from Kennect.
We help you automate your entire sales incentives process, saving you time and ensuring accuracy. Book A Demo NOW
Every business works to expand its customer base at some point in its operations.
And we try to find the most cost-effective and efficient way of getting it done.
Surely, collaboration with channel partners has always been an effective choice.
These channel partners are your resellers, distributors, and partners who take your product to a wider customer base.
Undoubtedly, they deserve fair compensation for the efficient work that they accomplish.
So how do you go about finding the best commission structure for your channel partners?
Well, we have all the answers you need.
This article helps you understand channel partner commission structure, its importance, and key factors. We give examples of the top 10 commission types and best practices to enhance your channel partner strategy.
So without much ado, let's begin.
Channel partners are individual or company collaborators who help sell or advertise your product or service. Their efforts as resellers, distributors, or partners help extend the reach of your sales efforts.
The commission made to these channel partners for their efforts and work is called the channel partner commission.
It is a mutually beneficial relationship. Your company can expand its reach without increasing your salesforce number. At the same time, the channel partners can benefit from the commission without having a product of their own.
If your company associates with a channel partner, then it's important that you build a well-structured commission plan.
To begin with, it motivates your channel partners. Incentives push them to promote and sell your products.
Fair compensation will ensure they prioritize you and invest more time and effort to boost your offering in the competitive landscape.
Well-structured commission structures come with a performance metric to track your partner's performance. This will help you understand their success rate in achieving sales and revenue goals.
Put the right amount of effort into building your commission structure and it will help you in future business growth.
As the business grows, a well-structured channel partner commission structure will easily be able to accommodate more partners seamlessly.
In the current market dynamics, a fair and competitive commission structure will attract top-performing channel partners to your business.
With the clear expectations that your commission structure provides they can easily achieve the desired results in no time.
In short, a well-structured channel partner incentive program provides transparency and clarity on how fair and competitive the commission is. This information helps foster strong relationships with your partners and drive growth and success.
Channel partners go the extra mile to promote your products to a larger customer base.
Their efforts alone call for the requirement of a well-structured channel partner program. This means businesses must take into consideration some key factors while designing their commission structure.
Incorporating these key elements ensures that your commission structure not only meets but exceeds expectations.
So what are these factors that provide a competitive advantage to its beneficiaries?
Businesses must study the market landscape and understand what the industry standards are. This helps provide competitive and fair pay that attracts and retains your channel partners.
Define your sales targets and evaluation metrics for channel partners. This will help them understand what is expected of them and meet these expectations with timely accuracy.
Clearly determine the roles and responsibilities of your channel partners. This will help in determining your commission rates and providing fair pay for their tasks and achievements.
Award due incentives and rewards for your channel partners for their achievements. Selling high-priority products or exceeding sales targets must be recognized with special bonuses.
Have clear communication on the payment terms and conditions. It must be made clear at what intervals and upon achieving what milestones will the partner start getting paid.
Provide fair and competitive pay to your channel partners. Be transparent when updates on the commission plan, performance metrics, and other commission reviews happen.
Designing a commission plan provides a clear path to monitor and track performance and payment for both the company and the channel partner.
There are a variety of commission types out there.
The choice differs depending on your product, the industry, the competition, and even partner preference.
So here is a list of the top 10 types of SaaS channel partner commission structures for you to choose from:
A straightforward commission structure where channel partners receive a percentage of the revenue from each sale they make.
Irrespective of the sales value or revenue generation, partners receive a fixed price for each sale they make.
A competitive commission structure where partners have the opportunity to earn higher commission rates as they achieve higher milestones.
In subscription-based models like SaaS, partners can earn ongoing commission as long as the customer contract is valid.
Channel partners can earn extra commissions as they achieve specific performance goals. This includes exceeding sales targets, selling high-priority products, acquiring new customers, etc.
Commissions are calculated as a percentage of the profit margin of the product. This will encourage parties to sell higher-margin products.
Commission can be calculated based on the activities accomplished by the partner. This includes lead generation, customer acquisition, number of products sold, etc.
Your commission plan can be a combination of a variety of commission structures. For example, you can provide a fixed pay along with performance-based commission, tiered commission, recurring commission, etc.
Businesses can assign different commission rates to different products or services. Higher commission rates can be assigned to high-priority products to encourage partners to focus on promotion and selling.
Depending on the market penetration or geographic region the commissions can change. Partners in hard-to-penetrate areas will be offered higher commissions to bring in sales and reach.
From the variety of options available, it depends on each individual business what best suits you.
Eventually, it all falls on your business objectives, the nature of your products, and other organizational goals.
By now you know that there are a wide variety of commission plan options available for you.
Deciding on which is the right commission plan is a subjective choice.
It involves taking into consideration a long list of factors including your internal structure as well as your channel partners' preferences.
So here is a checklist for you while choosing the right channel partner incentive programs for your business:
✅Understand your business model
✅Determine your budget availability
✅Analyze industry best practices
✅Establish clear performance metrics
✅Assess partner engagement in the commission program
✅Seek feedback from channel partners
✅Make a pilot trial to see its impact
✅Review and make required changes to suit your operations
Evaluating your commission structure from a company objective perspective and channel partner requirement perspective will help strike a balance.
It will help in choosing the right commission types that drive your business goals without compromising on your partnership and their interests.
Your channel partners are your greatest allies. Keeping them happy and satisfied is one of your top priorities.
So it's necessary that you include all possible best practices to make your commission structure perfect.
We have curated a list of the top 10 best practices that you can use during your commission structure implementation:
Making these practices a part of your everyday routine will enhance the trust of your channel partners, the effectiveness of your commission structure, and your overall channel incentive management.
Partnership works on the simple principle of mutual benefit.
While one party puts their effort, strategies, and tactics to achieve the goals and objectives of the other the latter pays back monetarily.
For example, in a channel partnership, the reseller or distributor helps you reach a larger customer base without increasing your sales force. In return, your business compensates them with fair and competitive pay.
Though this is the basic working principle, businesses cannot just stay happy with the basics.
To make your incentive structure work, you need to add more ingredients to it.
For transparency, include performance metrics.
For performance, include special bonuses and rewards.
For loyalty, ensure a clear understanding of the incentive program and timely payout.
In short, your incentive program must have components that motivate your channel partner to help achieve your company goals and objectives.
When your incentive program pushes your channel partner to perform and exceed performance, then it can be said that your partner incentive structure works.
Channel partnership is a cost-effective way of widening your customer base.
They are the resellers, distributors, and partners who take your product or service to newer customers, newer markets, newer regions, and geographical locations.
For the strategic work they do, it is important to provide them a fair and competitive pay.
That is why designing, building, and implementing an effective channel partner program is necessary.
For this, you need to study the market trends, determine metrics for objective evaluation, educate your channel partners about its specifics, and ensure timely and easy payout.
With channel partners spread across the country, manually tracking their work and progress becomes a tedious task.
Opting for a simple solution as automation can solve all your channel partner management issues- from performance management to incentive management.
With Kennect’s cutting-edge solution, we automate your entire incentives process, saving you time and ensuring accuracy. Remove the hassle of spreadsheets and manual errors.
Kennect provides efficiency. For more information Book A Demo with us.
Imagine this scenario: A sales rep puts a lot of effort into closing a deal. The company timely rewarded them with a commission.
Everything went fine when suddenly the customer canceled the contract after two months of signing.
The first consequence of this cancellation fell on the sales rep. Their hard-earned commission was reclaimed.
Without question, it doesn't feel right when your paid commission gets taken back!
Unfortunately in sales, there is a clause that approves revoking your paid commission.
Rightfully it is termed “claw-back.”
So what are the chances of such a recovery happening? What are the advantages and disadvantages of clawbacks in your sales commission management?
To begin with what clawback commission even means?
Let's check!
Sometimes, a signed contract can be revoked. A purchased product can be returned. A closed deal can be canceled. Or the payment process has not been fulfilled.
With the long sales journey and onboarding processes, it so happens that by the time this repelling happens, the sales rep is paid their commission.
This can create an imbalance in the company's financial records.
To overcome such financial gaps, companies create a provision where they can reclaim the paid commissions if certain conditions are not met. This taking back of paid commissions under certain conditions is called clawback.
Companies include this clause in the sales rep employment contract to prevent overpaying when the expected result is not realized.
A salesperson in the SaaS industry earns a commission based on onboarding new clients. They get their commission paid as soon as the contract is signed.
But here is the clause: if the client cancels the contract within six months then the sales rep must repay a portion of the commission.
For example, if the contract is canceled within three months then the sales rep needs to repay 50% of the received commission.
This commission clawback clause example shows that implementing such clauses will ensure that sales reps focus not just on closing deals but building strong customer relationships. It will also ensure that sales reps generate potential leads with a high customer lifetime value.
This helps reduce the risk of paying commissions on deals that do not bring a return on investment or long-term value to the company.
From a sales rep's point of view, clawback seems cruel. Your months of hard work are being taken back from you!
But businesses have their own reasons why clawback is necessary in their financial management and business operations:
Clawbacks safeguard the company’s financial balance from overpayment. It ensures that employees are not paid any incentive that later becomes invalid.
Adding a clause like clawback in the incentive program will ensure that sales reps focus on potential leads with high customer lifetime value and build relations that ensure retention.
With incentives, sales reps might start focusing on just closing the deals. Implementing clawback will ensure they focus on long-term goals of relationship building and customer retention.
Reclaiming commissions of invalid sales will help maintain the company's cash flow. It ensures that available funds are used resourcefully without overpayment or wastage.
Given these reasons, clawback makes sense. From a business perspective, it only seems logical and right to implement such measures.
A sales rep works with all their motivation and grit to close a deal.
Unfortunately, the sale did not complete the cycle even after closing and there are quite a few reasons for it.
All these incomplete reasons ultimately lead to a commission clawback:
Returned Products: When the customer returns a product or receives a refund.
Canceled Contracts: When a contract is canceled before completing the agreed duration.
Non-payment by Customer: When the customer fails to make the payment for the product or service.
Unethical Activity: When it is found that a sales rep used fraudulent and unethical means to close deals.
Customer Dissatisfaction: When customer dissatisfaction leads to the return of a product or cancellation of a contract.
Change in Order Value: When a significant change in order value happens like discounts or partial cancellation, the loss is balanced through clawback.
Administrative Errors: When administrative errors cause wrong payments or transactions.
There are various scenarios where clawback can occur and the sales rep has to pay back.
However, all these scenarios show a positive organizational approach towards sustainable business and long-term strategy.
When you come across the word “claw”, it brings to mind the claws of an attacking bear or an eagle swiftly landing to claw its prey.
The concept of claw-back typically brings to mind negative scenarios.
However, clawback clauses have their advantages. It cannot be simply categorized as a cruel act by the company just to snatch the paid reward from an employee.
So what are the benefits commission clawback clauses provide to your business operations? Let's check:
Adding a clause that commissions can be taken back when certain conditions are not fulfilled prevents overpayment and helps balance the financial sheet.
Sales commission clawback policy acts as a legal protection against fraud or misconduct. This discourages unethical sales practices and sends out the message that commission can be reclaimed when earned the wrong way.
Clawback ensures that sales reps focus on high-quality leads and work on customer relationship building. This encourages sales behavior that contributes to sustainable and long-term growth.
With clawback clauses, employees will be aware of the criteria for earning and losing commissions. This makes sales reps accountable for their work thereby fostering a culture of responsibility and integrity in the organization.
In short, claw-back is clawing the fraudulent, unethical, and misconduct from your operations.
Through these clauses, commission clawback promotes fairness, transparency, and accountability.
Hence, the clawback commission clause is a guardian of your company’s financial health and reputation.
Looking only at the brighter side of clawback sales commission, we might overlook the potential challenges and risks that exist.
We need to acknowledge and address these bottlenecks to ensure we handle the situation comprehensively.
So what are these disadvantages that we need to address to make the best use of clawback commission? Let's check:
Even after sales reps put the required effort to close deals, customers might return products or cancel contracts. When commissions are clawed back due to reasons beyond the salesforce's control it can lead to their dissatisfaction.
Clawback forces sales reps to work by the rulebook. They will think twice while taking risks or making innovative decisions. This can lead to demotivation and disengagement.
Adding a commission clawback policy in the incentive program makes sales reps feel that the company does not trust their work. This sense of mistrust negatively affects their morale and thereby the overall organizational culture.
Clawback calls for tracking of sales journeys before and after the signing of a contract. This requires detailed tracking of sales, performance metrics, and other contract clauses. It makes the administrative work burdensome.
Companies with a sales commission clawback policy must be well prepared to handle these drawbacks.
Address these limitations and find probable solutions to overcome these negative impacts.
It will help in enhancing your sales management, business operations, and overall organizational culture.
Clawback must be implemented with care.
Though the benefits of implementing commission clawback clauses are long, there are a few things to keep in mind.
Here are five best practices that will help you while carrying out clawback sales commissions in your operations:
Clawback is not easy to implement. There are consequences and after-effects to be anticipated.
Applying these best practices helps you be mindful of the impact clawback has on both the employee and the company.
In the beginning, clawback seems a rather unfair provision. Taking back what was rightfully earned through consistent hard work and effort.
But on a closer look, it becomes clear that clawback is a necessary clause for the sustainable growth of the business. All it does is put sales reps accountable for building long-term relationships with customers with high customer lifetime value.
When companies provide the logic and relevance behind the implementation of clawback, sales reps will understand its necessity and be ready to accept its terms.
However, it's upon the company to ensure fairness, clarity, and transparency to their salesforce.
A simple step is by automating your clawback implementation process.
With automation, affected salesforce will receive timely notification of clawback and accurate calculation of the amount to be deducted.
From the employee perspective, it provides a sense of fairness about the clawback provision and helps understand its clauses.
While from the company's perspective, it streamlines the entire process to reduce the administrative burden.
With our cutting-edge solution, Kennect automates your entire sales incentives and clawback process.
Remove spreadsheets and errors from your incentive management. To know more about our solution, Book A Demo NOW!
