Accounting departments face a big change with the new Revenue Recognition Standard (ASC 606). Everyone universally agrees that this new standard will have a transformational impact on how revenue accounting is implemented within the U.S. Additionally, when it comes to the costs of obtaining a contract, the way that organizations account for commissions will be turned upside down.
As a consequence, your accounting department will not be able to operate in the same way that they’ve been doing for years. Further, the new requirements won’t be comfortable for most of them. Instead of following a rule and inputting data, they’re being asked to make judgment calls.
To do so, they will need to understand the motivations and strategies of a business unit with a completely different mindset and approach. At the end of the day, it’s on the office of the CFO to make sure they’re prepared for and confident in their ability to meet the new requirements.
Giving Finance A Sales Primer
Sales incentive strategy has not typically been an area that accountants have spent time understanding so companies need to educate accounting staff about the intent behind different sales incentives and how they translate into increased revenue.
This is key for accounting to understand why base and variable pay can vary so widely across sales – and why it matters so much to the business. On top of plan complexity, there’s a whole language related to sales incentives. It’s worth taking the time to understand both before diving into plans to handle the accounting.
Start by creating an open dialogue between your accounting team and the person in charge of designing your organization’s sales compensation plan. Only by planning and asking the critical questions now can your team fully understand the intent and strategy that’s being implemented by your sales organization.
Recognizing Different Sales Roles
To fully understand the business motivation behind sales commissions, finance first needs awareness into the different sales roles and what each role brings to the company. Four common sales roles include: account executive; sales development rep; sales specialist; and customer success rep. Understanding how these roles vary is important in order to understand the types of behaviors you’re trying to get out of different sales commissions.
With a bigger impact on the initial buying decision, for example, an account executive (a.k.a. hunter) needs to be incentivized differently than a customer success rep (a.k.a. gatherer). Account executives typically have higher variable pay to incent them for their part in driving revenue for the business. On the other hand, customer success reps manage existing customers, focusing on renewal sales and up-selling existing customers.
The customer success rep role is less risky than that of an AE who must get new business to get paid – and they subsequently have higher base pay and lower variable pay. Understanding the sales roles helps your accounting team answer questions as to why one rep is being paid differently from another.
Finance also needs to fully understand sales roles to appropriately amortize commission payments. According to the new standard, amortization must be “on a systemic basis consistent with the transfer of goods or services to the customer.” So, in addition to accruing commission costs as assets, accounting also needs to expense them over time.
Commissions from anticipated recurring revenue for a customer, such as through subscriptions, upsells and cross sells, for example, are likely to be amortized. To execute on this, accounting must make reasonable judgments based on a typical scenario within their business.
Applying Finance Expertise More Strategically
While these changes are challenging for many in accounting, they also bring new opportunities. With greater understanding into sales processes, finance departments can apply accounting expertise more strategically and proactively in order to comply with changing regulations. Rather than just following set rules and crunching numbers, accountants can gain a new path for professional growth.
Stretching the Comfort Zone for Finance
Managing and reporting on incentive compensation has become infinitely more complex. To comply with new standards, organizations will need greater understanding into sales strategies, as well as insight into commission payments. Relying on spreadsheets to manage commissions won’t give the level of data required to be GAAP-compliant.
Sales performance management (SPM) software, such as Xactly’s solution, can help automate tracking and monitoring of this data. While it isn’t new for accountants to have their work scrutinized, the way that they justify their choices will now follow a completely different model. They can no longer explain decisions through rule-based processes. Under the new standard, finance departments will require an understanding about sales commission strategies before they can even implement a course of action.
This knowledge will be essential to back up their decisions. Xactly has put together a number of resources to help businesses understand the new Revenue Recognition Principle and its impact on commission expense accounting.