Commission on invoice or on collection: how to choose the trigger

Commission on invoice rewards the sale. The rep earns the moment the bill is raised. It is simple, and reps like it, but it also pays in full for sales that sit unpaid in the ledger for months and may never be collected.

Commission on collection rewards cash. Reps chase payments, which helps your bank balance. It also means a rep can lose a month’s pay because a customer’s accounts team is slow, sick or simply not answering the phone.

Delivery sign off sits between the two. The rep earns when the customer signs the proof of delivery or installation report. It suits businesses where wrong shipments, damaged goods and short supplies cause most of the disputes, since payment follows a clean handover.

A fair trigger sits where the rep has influence. A field rep selling to retailers can walk out with a cheque. A key account manager selling to a large buyer cannot make a payables department hurry, however polite the reminders are.

Look at your receivables. How many invoices run past terms, and by how long? If late payment is rare, an invoice trigger does little harm. If it is common, you pay twice for the same sale: once as commission, and once as the hours your finance team spends chasing the customer.

Split plans are common. Pay a part at billing and the balance on collection. The rep sees money early and still has a reason to follow the payment until the cheque clears or the transfer lands in your account.

Every plan fails at its edges. A customer returns a pallet. A credit note cancels half an invoice. A payment lands sixty days late. Write down what each of these cases does to the commission before the first one happens, and have the sales head sign it.

The usual answer is a clawback. A credit note reduces earned commission in the same proportion, and the reduction is netted off the next statement. Late payment can lower the rate through a slab, for instance a smaller rate once an invoice crosses its ageing limit.

Part payments need care. If a customer pays a third, the rep earns a third. The system must therefore track receipts against each invoice and not merely against the customer, or the arithmetic of a statement falls apart.

A plan that lives in a spreadsheet gets argued at every month end. Software ends the argument only when the rules are exact. It needs the trigger, rates by product or customer group, slabs, the clawback rule and the cut-off date for the period.

It needs clean data as well. Every invoice must carry the salesperson, and every receipt must be allocated to an invoice. Unallocated advances are the commonest reason a statement comes out wrong. Fix those first.

Print a statement per rep, line by line: invoice number, customer, amount, receipt date, rate and earned amount. Reps accept a number they can trace back to a document in their own hands.

Take last quarter’s invoices, receipts and credit notes. Run them through the draft plan for three reps, by hand or in a sheet, and compare the total with what you really paid. Differences teach you something.

Show the reps. Ask each to find a case that looks unfair. Two or three will turn up, and fixing them now costs far less, in money and goodwill, than fixing them after a wrong payout has already gone out.

Then choose one trigger and one clawback rule, write both on a single page and get the sales head to sign it before the next period opens.