Sales Performance Management Best Practices Blog

The biggest Sales Performance Management payoff you never heard of: Prior Period Adjustments

Posted by Jerry Hegarty on Tue, Apr 24, 2012 @ 14:04 PM

One of the hidden drivers of the accuracy of sales compensation payout calculations is a process known commonly as “Prior Period Adjustments” (PPA) or alternatively as “Retroactive Adjustments”. These types of adjustments are very complex to execute correctly but, done right, unlock a level of value that alone can often justify an investment to automate & improve your Sales Performance Management process.

A prior period adjustment occurs when it is discovered that an adjustment has to be made to a period that has already been closed. As strange as it sounds, sales compensation analysts are often the last people to hear about these adjustments. Plan changes, quota changes or promotions often happen in the field or at the region level out of view to the sales com team - by the time word formally gets back to the sales operations team several performance periods may have passed.  There are also occasions where a retro-active change may have to be made to sales transactions from a prior performance period, this can occur if credit was misapplied during order entry or a credit split is negotiated and agreed upon.
Prior Period Adjustment

How does this affect payment accuracy? Well, let's take the case of a retroactive plan change, suppose someone in your sales organization was promoted from an Associate Sales Manager plan to a Senior Sales Manager plan four months ago. There is a good chance that the last four monthly commission payouts have been incorrect as they were based on the wrong plan. In addition, if there are quarterly or yearly components on the plan, they too will probably be incorrect.

How can this be fixed? Leading Sales Performance Management systems (like NetCommissions), have the horsepower to make a prior period change to the system (i.e. retroactive plan change, quota change, etc.) and have the system automatically calculate the affect of this change and bring it to the current pay period as an adjustment. The affect of the change may be to an individual’s commission payout, but could also touch managers who may be affected by roll-ups (also referred to as an overlay plan).

Here is a real life story that occurred to a sales rep that has a sales credit issue for a significant transaction dated in a prior plan year. The sales compensation effect for the prior year has to be recalculated for all sales components on the plan (monthly, quarterly and yearly). The sales & quota from this position rolled up to executives & team support rolls on ‘overlay’ plans. The effect of this change had to be calculated for them as well (all affected plan components for all plans). The effect was on the order of many tens of thousands of dollars. Many companies when faced with challenges like this simply punt because when one is using spreadsheets or some of the cookie cutter SPM systems out there, there is simply no possible way to recalculate this scenario correctly.

But wait, there's more ..... In these scenarios, the true magic is not just being able to calculate the sales team’s compensation correctly, but to also communicate clearly to everyone involved the reason for the prior period adjustment, the effect of this adjustment in terms of what each person should have gotten paid and compare it to what was originally paid with the difference being an adjustment paid in the current pay period.

Those who are faced with this issue and are able to overcome it are able to deliver unequaled levels of service their their sales teams that can keep them from getting distracted by uncertainty regarding the accuracy of their sales commissions check and have dramatic affects on their ability to focus on increasing profitable sales for the business. 

NetCommissions Sales Performance Management

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Topics: Retroactive Adjustments, Sales Comp Plan Fundamentals, CFO/Finance Leader, Sales Compensation Professional