Unless you’re an accountant, a CFO, or another executive who deals with revenue issues, the odds are pretty good that you don’t spend your free time delving into the exciting world of accounting standards. And if you’re in sales? You’re probably aggressively uninterested in such things.
But right now, you shouldn’t be. A new accounting standard is about to arrive, and it will have a direct impact on your commissions checks (and potentially, the success of your company). Most companies have not addressed its requirements yet, so there’s a high probability that, whether you realize it or not, there is great uncertainty about your future commission checks.
Now that I have your attention, let me explain what the new standard, which has the catchy name ASC 606, means for companies. The new standard’s core principle is to recognize revenue and sales commissions for reporting purposes at the point when the customer gets control over the good or service provided. This is problematic, as this control may occur all at once or over time. The latter circumstance is becoming more commonplace as the subscription-based economy is growing.
Under the new rules, contract acquisition costs (such as commissions) must be deferred and amortized on a systematic basis if the contract will be fulfilled over more than a year. If the contract will be completed in 12 months or less, contract acquisition costs may be expensed as incurred, at the seller’s election.
ASC 606 requires sales organizations to align incentive expenses (commissions, bonuses, SPIFs and so on) with the new revenue recognition policies. For many salespeople, this will mean a direct impact to their comp plans—not necessarily in a positive or negative way but in the way their behavior is incentivized. For example, the practice of throwing in “freebies” to help close a deal may become much more limited, since inclusion of these items will slow down revenue recognition under ASC 606, negatively impacting the stop line. On the flip side, companies may choose to put greater incentives on behaviors that accelerate revenue recognition, perhaps offering greater commission rewards for high-margin sales or product bundles that include subscription services. Expect your finance team to work with sales operations to determine which bundles, service options, subscription terms, and other aspects are most beneficial to the business under ASC 606 and provide the best revenue outcome. And if you’re in sales, expect your compensation plan to shift accordingly to incentivize the sales of those products and services in the most optimal manner.
As this happens, you in sales will have a responsibility to push back as needed: your mission is to create happy customers, not to make accounting an easier job for finance. If changes in the comp plan work against customer satisfaction, they need to be identified and modified to tip the scales back toward the customer.
So ASC 606 will mean changes for how you’re incentivized and how commissions are paid over the life of contracts. That doesn’t seem so threatening—but what is threatening is an entirely new regime of incentives dropped on your lap as soon as the standard goes into effect. If you sell for a public company, that date is Jan. 1, 2018.
It’s in your best interest to understand what those new incentives and practices will look like before they’re implemented and start adapting your selling to them before the deadline arrives. Learning at leisure works better than learning under duress, and your feedback now will help sales ops and finance develop concepts that work for everyone by the time the first of the year is upon us.
That assumes your company is already digging into the standard. The chances are that your organization has made no effort yet to avoid a head-on collision with the deadline. A study released June 6 by accounting firm Baker Tilly Verchow Krause found that a terrifyingly tiny 11 percent of respondents said their organizations have begun making accounting process and system changes to prepare for ASC 606. If you’re in sales, that should worry you.
Not only does it keep you personally from preparing for the changes ASC 606 will impose on you, but it has dire implications for the health of your company and your ability to sell for it.
Failure to comply with the standard means risking a failed audit, which could potentially reduce stock price and even result in punitive action from the SEC or FASB. It could result in the overpayment of commissions that would come to light during an audit and affect your future commissions checks. And it could put your executives at risk of criminal charges. The standard is a big deal.
So, as a salesperson, what can you do about it? First off, if your commissions manager is doing things manually, urge them to adopt an automated solution. The task of examining a huge volume of account information to determine how much was paid in commission, who was paid this commission, and how much of this commission has already accrued and pulling all this information for reporting purposes will collapse any manual system managing more than a few reps.
This onerous exercise becomes even more frustrating in situations where a customer cancels a contract early, given the impact on the commissions already paid and/or accrued. Under the standard, a cancelled contract would require the selling entity to write off the commissions. Entities that have not historically tracked their costs of acquiring a contract must manually search through thousands upon thousands of customer sales contracts to unearth the particular one that has just been cancelled. Doing this manually is no longer an option. If your compensation management is handled manually, you should push for an automated solution—before it’s too late.
Secondly, you should start asking your sales and sales operations leadership how they’re preparing for ASC 606 and how it will change your incentives. If you’re lucky, they’ll be able to provide guidance and help you prepare for the change. If you’re working for the average organization, you may be met with a blank stare. If so, make them read this blog.
Third, you should prepare yourself for an unpredictable first part of 2018 as the sales industry works itself through the implementation of ASC 606. Companies will make mistakes, commission checks will be affected and sales operations organizations will hurry to adjust. Being prepared for it is the best way to stay focused on what is still most important: selling.
Learn more about our commissions and revenue recognition automation solutions.