Here at Sales Cookie, we help our customers automate their incentive programs. In a previous blog post, we took a broad perspective and described 6 steps to design any incentive program. Most incentive programs however include one or more sales commission plans. In this blog, we get into specifics, and explain how you can break down sales commission plans into fundamental components.

Whether you want to automate sales commissions or calculate them manually, you need to go through some analysis process to make sure you’ve taken everything into account and calculate commissions correctly. Simply repeat the following analysis process for each incentive plan you want to include in your incentive program.

What is your plan’s name?

This one is easy – simply give your plan a meaningful name which everyone will understand (ex: “AE – quarterly bonus”).

Who is this plan for?

Another easy one. Is this plan for all AEs? Should senior AEs be included? What about new AE hires? Should they be on a different plan?

What is this plan’s payment frequency?

You should identify your plan’s payment frequency (ex: monthly, quarterly, annual). Also, you should define when payouts should go out (ex: 2 weeks after the period’s end).

What is this plan’s data source?

Whether you call them deals, contracts, orders, invoices, purchases, opportunities, or transactions, you will need rows of data (records) to calculate commissions. You should identify a source of truth such as a system of record (ex: a CRM or Accounting system). If you don’t have a system of record, a CSV file may serve as a replacement.

Does this plan’s data source have the right fields?

It’s simply not possible to calculate sales commissions without the necessary supporting data. For example, if you only want to process opportunities whose stage is “closed won”, you should make sure that a corresponding status field is available. In some cases, supporting data may also come from users or from a product catalog.

Does this plan’s data source have unique IDs?

If you use a system of record (ex: a CRM or Accounting system), each record likely already has a unique ID. This unique ID can be used to avoid creating duplicates when making updates and clearly identifying each transaction. If your data source is a CSV file, consider introducing a unique ID. This could just be a sequential row ID, or it could be computed based on other fields.

Which data should be processed by this plan?

Most incentive plans shouldn’t process all rows of data when calculating commissions. Instead, they should only process qualified rows – ex: “closed won” opportunities. Besides the typical “closed won” filter, many sales commission plans have exclusions – ex: revenue from specific products should be excluded when calculating commissions.

What is the correct effective date field for your plan?

To calculate sales commissions for a given time period (ex: February), each row of data should have a corresponding effective date. This could be the date deals were closed, or the date when payment was received. In all cases, you should ensure this date remains immutable (once set) to avoid double-payment of commissions.

What are the correct crediting field(s) for this plan?

All plans measure either individual or territory performance. Your data should include fields which identify reps / territories to credit for each transaction. In some cases, multiple fields will specify a credited entity – ex: one field identifies an AE, another field identifies an SDR, and another field identifies a territory. The question is – for this specific plan, which crediting field(s) should be used?

Does this plan require crediting splits?

There are two types of splits: crediting splits and reward splits. This question is about crediting splits. If your plan will only credit one rep (or territory) per transaction, you don’t have a crediting split. Otherwise, you should specify rules to split transaction credits – ex: equal split, salary-weighted split, etc.

What are this plan’s performance targets?

Performance targets are sales goals which influence commission payouts. Some plans pay a flat commission for each credited transaction. Others have attainment thresholds, each with a different payout, accelerator, or bonus. Whether you call them quotas, tiers, or goals, you should define clearly how those performance targets are determined (ex: are attainment thresholds the same for all AEs, and what is their exact value?).

Are your plan’s attainment tiers cumulative?

If you do not have attainment tiers, simply skip this question. Otherwise, you need to further define your plan’s payment structure. Using a cumulative approach, each attainment tier pays rewards (ex: a % of revenue) based on its own “band” (ex: revenue), and we need to sum them all to calculate commissions. Using a non-cumulative approach, rewards are paid based on the highest attained tier.

Does this plan have draws?

If your plan should provide a guaranteed minimum to some reps (ex: because they are new hires and need to ramp up), you need a draw. Your draw can be non-recoverable, in which cases all commission “padding” you provide will be forgiven. Or it can be recoverable, in which case it will need to be repaid to your organization once reps start earning on-target commissions. In all cases, you should define a/ who benefits from the draw, b/ how draw amounts are determined (ex: fixed, based on salary, etc.) and c/ whether they are recoverable or non-recoverable.

If you have recurring transactions, how are they represented?

Many businesses have recurring transactions. Some organizations represent recurring transactions using a single record (each with a contract start date, and a recurrence frequency). Others represent recurring transactions using individual records (each with its own recurrence date). How you represent recurring transactions can have a great influence on how calculations must be calculated (learn more about this topic here).

If you have recurring transactions, how do you pay commissions?

Some businesses have recurring transactions but pay commissions upfront – ex: based on each deal’s total contract values. Other businesses prefer to pay commissions over time. Both have advantages and disadvantages. For example, paying commissions over time automatically handles cancellations. However, it can take some time for new reps to build a large enough basis of recurring commissions (learn more about this topic here).

How should this plan handle refunds (or failure to pay / claw backs / reversals)?

This question is not just about how you represent refunds / cancellations (ex: using a negative amount vs. using a “refund” transaction type with a positive amount). It’s also about the period against which any refund / cancellation should be counted.

Suppose that we’re in June, and that a January deal you already paid commissions for was (finally) marked as lost. Some sales organizations want to adjust already paid January commissions. This is not a viable strategy:

  • Plans with attainment tiers do NOT have a per-transaction commission payout
    • Learn more about this topic here
  • You will need to constantly re-calculate commissions for all previous periods
    • Ex: when in June, recalculate for Jan, Feb, etc.
  • Your reps will likely never understand their sales commission statements
    • Due to fragmented deductions for Jan, Feb, etc.
  • Payroll will need to make delicate adjustments for various past pay periods
    • Payroll will need to figure out “deltas” for Jan, Feb, etc.
  • You are also increasing your legal liability
    • In some US states, it’s illegal to have deductions for commissions once earned

You’re much better off doing one of the following:

  • Count refunds (or failure to pay) against the current period (not previous periods) OR
  • Declare and pay commissions based the date when you receive payment from customers

Learn more about this topic here.

Does this plan declare commissions as earned – but holds payment of commissions for each transaction until you receive corresponding payment from customers?

Some sales organizations declare commissions as earned, but hold payment of commissions until payment has been received from customers. For example, they want to show commissions for January, but only part of those commissions will be paid out to reps because it is conditional on (later) receiving payment from customers for corresponding transactions. Unfortunately, this approach is flawed:

  • Plans with attainment tiers do NOT have a per-transaction commission payout
    • Learn more about this topic here
  • You will need to constantly re-calculate commissions for all previous periods
    • Ex: when in June, recalculate for Jan, Feb, etc.
  • Reps will most likely not understand their sales commission statements
    • Due to fragmented payments for Jan, Feb, etc.
  • Payroll will need to make delicate adjustments for various past pay periods
    • Payroll will need to figure out “deltas” for Jan, Feb, etc.
  • You are also increasing your legal liability
    • In some US states, it’s illegal to declare commissions as earned but hold payment

You’re much better off doing one of the following:

  • Declare and pay commissions based the date when you will receive payment from customers OR
  • Pay commissions upfront, but implement a claw back as described above

How precisely are commissions calculated for this plan?

One final question! Here you should take time to specify exactly how commissions are calculated. If you already have spreadsheets, you should take the time to decode every formula. If “magic numbers” are used to calculate commissions, you should also explain where they came from. For example, if you have a quota of $103,940, how was it determined, and does it depend on the rep? To document your plan, take time to provide examples of actual commission calculations, step-by-step. Your team will thank you!

In Conclusion

In this article, we explained how you can break down any incentive plans into more fundamental components and covered some important “gotchas”. Whether you want to calculate commissions manually or automate the entire process, your analysis should prove worthwhile because it will a/ avoid calculation mistakes, and b/ greatly help other stakeholders (ex: sales ops, sales managers, legal, payroll).

Visit us online to learn more about how you can automate your entire sales incentive program!