Thursday, January 1, 2009

Accounting for Sales Compensation—Expense, Accrual, Reconciliation. Accounting and Finance Policies and Procedures

Accounting and Finance Policies and Procedures — Accounting for Sales Compensation—Expense, Accrual, Reconciliation

It is ABC Company's policy to compensate its sales representatives for the development and maintenance of the Company's business within assigned accounts or territories and in accordance with the Company's Incentive Compensation plan.

All revenue and nonrevenue incentives will be paid in accordance with the sales representative's individual compensation plan. Revenue-based incentives will be paid on revenue recognized in accordance with U.S. Generally Accepted Accounting Principles (GAAP).

Eligible employees must approve and sign their sales compensation plan and return it to the Human Resource (HR) Sales Commissions Administration no later than the end of first quarter or within 30 days of employment. If an approved, signed plan is not received, commissions may not be considered earned and therefore may be forfeited.

Sales representatives and eligible customer account managers have a target earnings objective, made up of a base salary plus incentive compensation primarily earned from sales.
? Base salaries shall be paid in accordance with the Company's regular payroll cycle and represent compensation for maintaining relations with the Company's existing customers, the development of new business, short-term cover for other accounts not on their target account list, and the general performance of the job position's other responsibilities. Base salaries generally represent 20 percent of the sales representative's expected compensation, including commissions.
? Incentive compensation varies by employee, depending on the sales plan in which the employee participates. Incentive compensation details can be found in the employee's individual compensation statement.

Establishing Quotas
During the annual Financial Planning and Analysis schedule, Sales Finance develops revenue quotas and compensation targets on a global and geographic basis.

Quotas are established based on a set of planning indicators that consider the economic indicators and market potential of each region. The Company's Research, Development, and Engineering areas provide input regarding the release and availability of new products. The Company's financial pricing areas provide input regarding pricing and costing assumptions. The result of these considerations are evaluated by country and rolled up to the geography before consolidating at the Company level. Geographic sales and finance management discretion adjusts the geographic quota targets before an approved quota plan is rolled down to the geographies eligible sales managers and representations.

A Sales Compensation Committee made up of Executive representatives from Research, Development, and Engineering; Finance; and Sales Operations and led by Sales approves the sales quotas by geography and oversees the implementation of the Sales Compensation plan. This committee meets monthly to review quota sales compensation attainment.
At the geography and regional level, sales compensation expense is calculated based on the formula described within the sales compensation plan. Sales compensation expense includes the basic salaries and incentive compensation. A fund for additional awards and bonuses may be determined and included as part of sales compensation and maintained at the Corporate Sales Operations only.

Multinational and geographic account activity shall be planned at a global level and local activities allocated using an intra/inter area/regional split; the allocation must equal and not exceed 100%. By region, customer accounts are identified by the salesperson; with the salesperson serving as the primary customer relationship manager.

For all cross-territory/geography transactions, fee-splitting arrangements must be agreed upon, in writing and in advance. The allowable fee-splitting arrangements are 80/20, 70/30, 60/40, and 50/50. Any other fee-splitting arrangements require advance approval by Sales Executive Management.
In no case shall the commissions paid to managers and sales representatives exceed 100% as calculated from the sales compensation planning model.

Respect of Territory Boundaries
Sales representatives and their management are expected to respect the geographic boundaries identified as "territories." Sales outside their assigned territories result in performance credit not accruing to their target quota.
Territory changes normally become effective on the first day of the month following the month in which the Company notifies the sales representative of the change.

Establishing Commissions
Commissions are calculated based on the net new contract value added during the period. Net new contract values are determined based on the value of new contracts less those contracts that have expired, less returns and adjustments due to contract changes and accounts receivable balances e.g., bad debt write-offs, short payments.

Commissions are not considered earned by the sales representative and payable by the Company until:
? The Company receives full payment of all amounts due from a customer during the initial 12-month period of a transaction document.
? All other requirements set out in the transaction documents have been fully satisfied and completed.

The Sales Compensation Committee at its sole discretion determines whether the requirements for payment of commissions for any transaction have been satisfied and its decision is final and binding on all affected parties. The Company will not pay commission for transactions in the following situations:
? Customer default or transaction termination
? Beta transactions and product trials
? Trials
? Product returns

The net new contract value quota is broken down into monthly expectations. Generally, the annual quota is spread out during the year smoothing the "rhythm of the business" provided by Financial Planning and Analysis. The "rhythm of the business" generally shows the dollar amount per contract growing quarter over quarter until the fourth quarter, which represents the Company's busiest sales volume quarter.

Unless specified by local laws and regulations, commissions owed to employees are paid in the last pay period of the month and 30 days after the transaction is deemed complete.
Based on transaction and activity reports, Sales administration is responsible for calculating the sales compensation paid to sales managers and representatives.
In accordance with the accrual policy, monthly accruals shall be calculated by Sales administration for sales commissions earned and not yet paid. The accrual must be reversed the following month.

Performance Measurement
Measurement of performance and quota attainment is based on the net new contract value generated from accepted orders. At least quarterly, the sales manager and sales representative formally assess quota attainment and performance management.

Winner's Circle Award
Winners Circle is an annual award to selected sales representatives, which executive management in its sole discretion may offer to a percentage of those eligible sales representatives and account managers who have achieved their sales quota. The details of this award are determined by the Sales Compensation Committee and may include gift certificates, trips, or cash bonuses.

Quota Changes
In order to balance performance and maximize sales for a geography, Sales executives may approve changes to an individual employees quota if it does not affect the geographic area's quota. Changes must be submitted to Sales administration at least one week prior to the effective date.
Quotas shall be fully distributed to individual account managers with no quota held at the management level except where the manager holds a quota covering a period until a new sales employee is appointed. Quota changes must affect only future periods.

Termination of Employment
In the event of an employee's employment terminates, sales incentive compensation should be paid in accordance with the payment terms of the employee's incentive compensation plan.

Termination of Plan
In the event an employee transfers to a position without an incentive plan or into a position with a different plan, the sales representative shall receive the eligible amounts earned from the previous position and is subject to the new commission plan in the new position.

Transaction Audits
In order to ensure that transactions are aligned with the Company's business objectives, the Company, in its sole discretion, reserves the right to review and audit any and all transactions periodically and without any advance notice.
Any executive who knowingly participates in a transaction that is designed to and/or does circumvent the provisions of the sales plan will be discharged.

Controls/Areas of Responsibility

HR administration responsible for sales compensation maintains the master data for all sales managers and representatives eligible to receive sales compensation. There must be no side agreements or contracts with employees.

Financial Planning and Analysis is responsible for approving and monitoring the:
? Sales Incentive Compensation plan
? Country and geography sales quotas
? Compensation expense targets

Sales administration is responsible for:
? Providing timely and accurate approval and processing of commission payments
? Monitoring and tracking changes to territory and account splits
? Conducting spot audits of commission payment calculations
Sales Management and the Area Controllers are responsible for the approval of Sales Compensation plans, quota changes, and mid-year account or territory changes and the sales compensa tion expense.

Sales compensation is processed through the Payroll department.
The employee is responsible for bringing any discrepancies, positive or negative, in writing to the attention of Sales administration within 30 days from the issue of the statement.
Under no circumstances must agreements outside the scope of this policy be honored. Any and all adjustments must be documented and approved by the Sales executives and the appropriate Area Controller.

For more Information:
Business Accounting Resources
IFRS 2008, GAAP 2008, CPA Exam Review 2008, Lean Accounting, Design and Maintenance of Accounting Manuals, Accountants' Handbook


1 comment:

  1. What do you feel is a proper distribution between cash and non-cash incentives? Are there any benefits to increasing the non-cash incentives in regard to taxable deductions?



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