A New Challenge for Sales Compensation Management
ASC 606, and its international counterpart IFRS 15 are here, and they are challenging the way companies calculate commissions.
Providing a new way of accounting for revenues on contracts with customers, both ASC 606 and IFRS 15 will have a large impact on sales compensation, as it falls into the category of "incremental costs of obtaining a contract."
The Impact on Compensation Calculation and Reporting
Regardless of when you receive payment, under ASC 606, you can’t recognize the revenue until you satisfy the related performance obligation by transferring a promised good or service to the customer.
The new rules address the increasingly common case of goods and services that are delivered over time, governed by detailed contract terms. Companies whose sales fall into this model—Telecom, Software, Real Estate, and other industries with long-term contracts—will need to adjust to this new standard, calculating and reporting on the related revenue-based compensation correctly, transparently, and in an auditable way.
Case Study: Software Provider—Questions to Ask
A customer signs a multi-year contract for your Software-as-a-Service solution:
- When do you recognize the revenue?
- How and when do you commission the salesperson that sold the deal, and the sales manager or other sales team members in a group performance plan?
- Which types of compensation need to be capitalized, which expensed?
- What happens when the contract is modified?
- How do you track this on a contract-by-contract basis, or even at a line item level on the contract over time, for compliance reporting and risk management?
- How do you develop models for compensation planning and forecasting accurately, given this complexity?
Fortunately, with the right compensation solution, you can track sales details down to the transaction line item level, simulate compensation plans and models, ensuring they meet business goals and compliance requirements, and produce the detailed reporting needed to support sales and sales operations, finance and compliance.
Download the report on how your organization can comply with ASC 606/IFRS 15 requirements.