Accounting Policy and Procedure for Sales Compensation – Expense, Accrual, Reconciliation – Part 1

October 27, 2009 by kutenk
Filed under: Accounting 

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

Policy
It is 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.

Procedure
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.




Geography/Territories
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.

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