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Can You Justify CommissionCalc? How To Calculate The Payback Period

Automating commission computation will save money and improve operations for

years into the future. However, it will also require an initial investment. Like every other business investment, the benefit must be sufficient to justify that investment.

Since the benefits and the costs will be different for every company, FTI has

created an Excel spreadsheet into which you can enter your own data. The spread-sheet will then compute how long it will take you to get a return on your invest-

ment. You can download this spreadsheet from our web site.

Figure 1: Downloading the CommissionCalc ROI Calculator

This white paper explains how to use that calculator, using a typical small CommissionCalc user as an example. Larger users will generally get a better

payback.

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Benefits Automating commission calculation yields two broad categories of benefit: time savings and improved data. Each of these categories contains several items.

Time savings is the easier category to quantify.

Figure 2: Value of Time Saved

The very easiest savings to identify is the time which the commission accountant spends computing commission. This number is useful for another reason, too. If a substantial amount of manual effort is required to compute commissions, it is likely

that the other savings will be high, too. For example, if computing commissions re-quires 8 hours of manual spreadsheet editing, the results are guaranteed to contain

a significant level of errors.

In the example above, we have assumed that 8 hours is, indeed, the amount of time which the commission accountant spends each month computing commissions.

The rate, $60 per hour, includes fringe benefits and perhaps some other overheads.

In addition to this direct accounting time, manually computed commissions usually

result in “shadow accounting”. That is, salespeople and supervisors spend time checking the calculations. This is harder to measure, but it can be a substantial ex-pense. The best way of estimating whether it consumes a large amount of time at

your company is to observe how often salespeople request corrections. For every error they report, the salespeople have spent time confirming that a number of

other calculations were correct.

Lastly, when errors are found various people must spend time discussing and cor-recting the payments.

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As you can see, the cost of shadow accounting and correcting errors can exceed the cost of calculating commissions in the first place.

The second broad category of benefit from automating commission computation is that you will get better data – i.e. error free, easily understood, timely data.

Figure 3: Value of Better Data

Since commission recipients are better at finding underpayments than overpay-ments, manually computed commissions are generally overpaid. The percent of

overpayment depends on the error rate, which in turn depends on the complexity of the plan and the amount of time which the accounting department has available to

check their work. Although it is difficult to measure overpayments, this is a con-crete cost – a very real, out of pocket expense. After installing CommissionCalc,

people are frequently surprised when they find out how high their error rate had been. In fact, some then use CommissionCalc to recompute old commissions and claw back previous overpayments.

More nebulous, but equally important, is improved salesperson motivation. This re-sults from improved accuracy and timeliness, and sometimes also from clearer re-

ports. Although this cannot be measured, the purpose of a commission plan is to motivate salespeople. If the salespeople do not trust the plan, or if they receive their rewards late, it will not achieve its purpose as well as it could.

Lastly, some companies value the improved management information which an au-tomatic system provides. For example, it is possible to test alternative commission

rules to optimize the plan.

The benefits of improved data – especially elimination of errors – often exceed the benefits of time savings. In the example above, however, they compute to about

the same amount.

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Cost Automating commission computation also results in two types of costs. The first is an annual cost for software support. In CommissionCalc’s case, this is a small num-ber. Nevertheless, it should be subtracted from the annual savings.

More significant is the cost of buying and implementing the software.

Figure 4: Purchase & Implementation Cost

The cost of a CommissionCalc license depends on your transaction volume, as

shown at www.commissioncalc.com/Prices.html

The cost of consulting varies from company to company. If you can use one of the

standard CommissionCalc templates, no consulting will be required. Otherwise, the cost depends on the complexity of your commission plan and whether you can use a built-in interface or require a plug-in one. (These two interface types are de-

scribed at www.commissioncalc.com/ERP.html.) FTI can usually quote a fixed price for the consulting required to implement CommissionCalc, once the commission

rules are defined.

Finally, your employees will need to spend some time working with the FTI consul-tant to implement CommissionCalc. Since most of that time will be spent by the

person who presently computes commission, the ROI spreadsheet uses the com-mission accountant’s hourly rate here.

Payback With the sample data we have used, the investment is earned back in 3 months, as shown below. Although your numbers may be different, if your commission accoun-

tant spends 8 hours or more per month computing commission, the payback will ordinarily be measured in months.

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Figure 5: Sample Payback Analysis