December 21 by Sarah Van Caster
Odds are you have heard of “ASC 606”, but if you are not in accounting, you may or may not be following the details of this new regulation’s potential impact. Yes, it is a new accounting regulation, but its impact is going to be felt across industries and across organizations, including sales departments. The major ASC 606 change for sales organizations is the need to align sales incentives (commissions, bonuses, etc.), with new revenue recognition policies. For many salespeople, this will mean a direct impact to their compensation plans – not necessarily positive or negative – but the ways people get incentivized will need to change. In order to avoid confusion and frustration, it will be critical to communicate these changes before they take effect.
ASC 606 is a new U.S. accounting regulation rolling out at the end of December 2017 for public companies and a year later for private entities. IFRS 15 is the global equivalent impacting global organizations. These new regulations will standardize the way recurring revenue from customers is recognized. This is a process that is historically inconsistent, and messy, across companies and industries. Recognizing revenue often has many different factors coming into play throughout the lifecycle of the sale – subscription models (monthly fees vs. up-front costs), product and service bundling, termination fees, rebates, warranties, shipping, etc. If you are an organization that processes millions of transactions or generates billions of dollars, you can see where these seemingly endless combinations of revenue recognition can get complex, and difficult to track consistently.
In the past, rules on revenue recognition were not clearly established and ASC 606 and IFRS 15 will address this inconsistency – ensuring more standardization, transparency and uniformity. Enterprises will now all follow the same five-step process for recognizing recurring revenue.
For those with recurring revenue streams, this rule change will have a dramatic impact across business processes and systems, and it may also require changes to sales incentives.
The Impact to Sales Teams & Incentives
For many organizations, ASC 606 is going to require adjustments to sales compensation plans. For example, if a salesperson is used to bundling in for free “add-ons” to close a deal (i.e. free support, extended warranties, waived fees, etc.), some of these items will now slow down revenue recognition with ASC 606, thereby affecting the company’s top line. You many no longer want salespeople using these types of “sweeteners” to close a deal. Conversely, there may be options that accelerate revenue recognition like offering higher commission payouts for high margin product sales, product bundles that include upfront purchases with subscription services or other programs that bring revenue in faster.
The finance team will determine the best contracts, price bundles, service options, etc. that work with the new revenue regulations, but it is up to the sales organization to sell products and services that provide the best revenue outcome. The best way to ensure salespeople do this is by implementing incentives that align with your corporate strategy. Incentive Compensation Management solutions can help align incentives and drive sales performance and Configure Price Quote (CPQ) solutions can be leveraged to guide salespeople to build quotes that are ASC 606 compliant and optimal for business outcomes.
New Challenges with Managing Sales Compensation
In addition to changing existing sales compensation plans, under ASC 606, you will likely need to track, record and report on sales commissions at a much greater level of detail than what was previously required. The new regulations will require tracking of detailed commission data at the customer, contract, product, salesperson, manager and department level. If you are not currently tracking this data today, you will need to address how to report this information moving forward. When evaluating changes to your sales compensation, make sure your Incentive Compensation Management (ICM), solution can support all of these new requirements, in addition to your compensation structure adjustments. It will also be critical to understand whether the changes you have made to your incentive plans are cost effective and driving the right behaviors. Your ICM solution will need to quickly help you assess your plans, model changes for the future and help you maintain the requisite audit trail.
Looking for more information on how ASC 606 will impact you?