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Sales Commission

 Details
 
Sales Commission programs the following components typically (but not always).
 
Sales Commission Plan Transactions Commission Rate
Plan Duration Attainment Commission Tiers
Plan Period Commission Draw
Performance Measure Bonus Cap
Goal
 
Sales Commission Plan

This is the crucial underpinning of the sales commission program. The plan is in essence the agreement between the company and the employee as to the performance expected of the employee and the compensation for the performance at varying levels. This is generally put down in document form and provided to the sales people. When hiring a new employee this is one of the items that the employee and company may negotiate.

This document generally includes information regarding the duration of the Sales Commission Plan and actions that the company and employee are responsible for in the case of events such as employee termination/transfer, etc. This is an important document and should be created with the goal of clearly communicating the plan purpose. It should have clear information on the goals, the calculation logic with examples and activities to be done in the case of exceptional situations.


Plan Duration

This is typically the period for which the compensation plan is valid. It typically is a year long and generally corresponds to the company’s fiscal year. If the employee joined late in the year or terminated during the year, the period maybe adjusted accordingly.


Plan Period

This is the smallest period within the plan duration for which goals are set and attainment is measured. This can be a month, quarter, half-yearly, full year or other periods. Typically goals are set for the entire year, but attainment is measured on a monthly basis and payout is calculated on a monthly basis.


Performance Measure

This identifies the performance that the company is interested in measuring as it relates to the specific salesperson. For example, the company maybe interested in measuring ‘Total Revenue” brought in by a sales person, but maybe interested in “Gross Profit” of total revenue brought in by another sales person.
 
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Goal

A Goal (aka Quota) is the target that the salesperson is expected to achieve in a certain period for a specific performance measure. Typically it would be expressed as something like “$250,000 Quota for Total Revenue in First Quarter of 2003”. Quota as a term is typically oriented towards sales (financial) performance. Goal is a more generic term for Quota and includes targets for other performance measures (e.g. Goal to achieve Customer Satisfaction of 90% in year 2003). Goals are set at a particular frequency within the plan duration, such as Monthly, Quarterly, Half-yearly and Annual.


Transactions

Data that provide information on the performance achieved by the salesperson is typically available to the calculation process as transactions. Transaction can be of different types: some plans incent based on Sales orders, other plans incent by Invoices, or Payments or completion of service, etc. These transactions have to be processed and compared to the Goals as a first step to calculating commissions. Commissions can be calculated against transactions individually at different rates or they can be cumulated for a period and calculated together at a single rate.

Attainment

Attainment indicates the achievement of the salesrep against a certain quota for a certain performance measure. Transactions are typically added up to arrive at a attainment total (e.g. Attained Sales of $200,000 this month on a Quota of $250,000). The comparison of Attainment to Quota can be expressed as a percentage as well (e.g. Attainment percent of 80% this month on a Quota of $250,000).

Commission

Commission is a form of incentive payment. This is a very common method of payment for sales people. It is typically paid as a direct portion of incoming revenue or margin. It is typically represented as a percentage of revenue or margin. Commissions can be paid against individual transactions such as orders or paid as a portion of total transactions for a period. Commissions are paid as frequently as possible in a plan year and typically are paid once monthly. An example commission could be "Pay 5% of all Sales Revenue to Salesperson A on a monthly basis".
 
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Bonus

Bonus is a form of incentive payment. This is a very common method of payment for sales people and managers. It is typically paid against total performance for a period. It can be totaled together for a geographic region, business unit, etc. The performance can be for various measures such as sales, units sold, customer satisfaction, etc. Bonuses are paid for longer periods typically; it is common to have quarterly and annual bonuses. An example commission could be "If Units sold is more than 10,000 for Region A, then pay Regional Manager a $5,000 bonus).


Commission Rate

Commission rate is the portion of transactions (such as orders) that are to be paid to the sales rep. This is typically expressed as a percentage. An example commission rate could be "Pay 5% of all Sales Revenue to Salesperson A on a monthly basis", where 5% is the commission rate.


Commission Tiers

Commission rates can sometimes be variable based on attainment against a goal for a particular performance. If there are multiple rates, then they can be referred to as Commission Tiers. An example Commission Tier could be "For achievement of Sales Revenue against goal, pay sales rep a portion of Sales Revenue at the following rates on achieving the following tiers-"
  Attainment % Rate %
  < 100% 5%
  101% - 150% 7%
  151% and above 10%


Draw

Draw is basically an advance provided to the payee by the company to be recovered against future earnings. Draw is typically used to make sure that a salesperson is provided a minimum amount of money per month and is used normally for the first few months after the salesperson has joined the company. Draws are typically recovered month to month. Sometimes draws can be forgiven at the end of the month. Draws that are not recoverable are also called Guarantees.


Cap


Cap is capping of the amount of money a payee can make in a particular period. It can be applied for a particular period, like a month, or for a full fiscal year. Sometimes capped amounts can be carried forward to future months.

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