|Sales Commission programs typically have the following components (but not always).|
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 performanceexpected 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/transfe
r, 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.
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.
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.
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.
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.
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 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 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".
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 RegionA, then pay Regional
Manager a $5,000 bonus).
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 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-"
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 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.