I had a fascinating discussion recently with a colleague of mine who was interviewing several candidates for their credit and collection manager position, and one of them was particularly intriguing.
When the subject of compensation came up and the candidate was asked how much salary they would be expecting, the candidate mentioned that she would like to receive her compensation in two parts: Base salary and then commission on the savings brought about by the improvements she would implement. When my colleague heard her offer, to put it lightly, he was “blown away.”
In all of the decades that he has operated his manufacturing company and was involved in the hiring (and sometimes the training) of financial, accounting, administration, and human resources employees, he had never come across anyone, especially someone working in the credit (and collection) function to consider accepting commission as part of their compensation, let alone offer it.
My colleague dived much deeper into the reasons why this candidate would like to receive commissions and more details as to how she would accomplish this. Here is some of the logic behind the scenes.
1) Helping to complete and maximize each sale safely – This candidate explained that she has a history of working with sales to customers/clients that do not have stellar credit ratings. Whether it’s through:
- integration of credit insurance
- non-recourse factoring to secure the sale
- third party collection agency quote to cash platforms, or
- working with the client to build a payment-in-advance accumulation buffer (see explanation below)
The candidate felt that her creative ways to maximize sales safely could significantly increase the company’s sales upon which she would like a commission. For example, if she were able to help her employer and the sales team to sell an additional $1 million in net sales, she would like to receive an agreed upon commission against this additional sales amount. As she put it, “I really see myself as a part of the sales team that has the goal trying to make every sale possible.”
2) Reducing DSO – If this candidate were able to reduce DSO by ten days, which in turn resulted in bringing in additional of $500K on an annual basis for the company, then perhaps at current annual CD rates of over 4%, here too, she would prefer to receive some kind of commission against this result.
3) Reduction of Bad Debts, Bad Debt Expense, and the Allowance for Doubtful Accounts – As you most likely know, the Allowance for Doubtful Accounts is a “contra asset,” because it reduces the amount of an asset, in this case the accounts receivable. The Allowance (sometimes called the Bad Debt Reserve) represents management’s estimate of the amount of accounts receivable that will not be paid by customers. If the actual bad debt experience differs, then management needs to adjust its estimation methodology to bring the reserve more into alignment with actual results.
Now, the more there are bad debts in one year, the more Allowance for Doubtful Accounts should be adjusted in the next year. This contra asset, in essence a liability, could diminish a company’s borrowing power by lowering the amount it may need for a revolving loan and/or increase the borrowing rate. Either way, since the candidate feels that she could lower uncollectible debts, this would increase cash flow and subsequently lower bad debts and accompanying Allowance for Doubtful Accounts. This would all translate into borrowing savings for which she would like to be compensated on a commission basis.
4) Credit department operational efficiency – How much does it actually take to successfully operate the credit department? The candidate felt that subsequent to doing a complete operational audit that entailed breaking down the total cost, if her improvements decreased the costs by 10%, again this could be viewed as a commission-based compensation goal.
The one part that my colleague felt was amazing was that this candidate continued to express how the credit and collection department should be viewed as a profit center. The more profit they are incentivized to create through various improvements, the more appropriate commission-based compensation she would like to receive.
Not all the streams of suggested cost savings need to be considered for commission but one or two that are easily identifiable and can be measured could certainly fit into this idea.
Although this compensation arrangement may not work for many credit managers, for a few, perhaps some, this might just be a differentiating point between being a regular candidate and one who really stands out. At least my colleague thought so when he decided to hire her.
• Payment-in-Advance Accumulation Buffer – This is a process in which you add an additional 10% to each sale and hold it aside until the end of the year. If the customer purchases $100K per month and you charge $110K, the additional $10K each month accumulates until you have reached a certain goal amount, perhaps $100K, to cover any possible future defaults. This $100K accumulates interests and is returned when the customer no longer places orders. This is a technique that is sometimes implemented on customers that cannot be covered under credit insurance or non-recourse factoring. There is a short-term risk until the buffer reaches a sufficient level.
Your questions and comments are most welcome (nseiverd@cmiweb.com).
Nancy Seiverd, President, CMI Credit Mediators, Inc.
