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Calculating Sales Commissions

We are a small company (65 employees) and the accounting department has calculated the more complicated commission programs, which involve different commission percentages and tiers depending on the product and gross margin %, for many years. Recently the sales department has asked to start calculating the commissions themselves. I am not comfortable with this for many reasons, but primarily because it is a complicated commission program, and it takes one of my staff several hours to calculate the commission every month. In my opinion, this would typically fall under the HR department, however, as with most small companies, we don't have an HR department and it is one of my responsibilities. My questions are: Who in your organizations typically calculates the monthly commissions? Also, how long does it typically take to calculate the commission? Thank you for your feedback, it is very much appreciated!

Answers

Topic Expert
Vernon Reizman
Title: CFO
Company: RCM Industries, Inc.
(CFO, RCM Industries, Inc.) |

When I was VP Finance at a medical products company we had about 50 in house sales reps and another 10 outside firms across the country serving retail and hospital accounts. Commissions were fairly complex but we had the sales department handle the core work as they were the most versed with the ins and outs. Over time we did eventually add a review step by accounting as an audit function. I think much depends on the people you have in sales. We had a sales analyst who had this capability. I would not have left it in sales without a capable person. I believe the monthly work to compute took a full day of the time even though the analyst had a fairly automated methodology.

Topic Expert
Mike Caruana
Title: Director of Financial Services
Company: Diamond Resorts International
(Director of Financial Services, Diamond Resorts International) |

I agree, Vernon. Sales can handle a lot of the 'heavy lifting' and perform most of the core work, but only if the commission plan is very well articulated in a policy document. One can be created easily enough, but it should include tables and text that capture the different tiers, etc.

An interesting exercise to start the process would be having both Sales and Accounting document their understanding of the existing commission plan. Undocumented comp plans can eventually start taking on lives of their own. And if that's actually occurred there, it would be a great illustration of why it needs to be documented in a policy. If everyone's clear, then that makes writing the policy that much easier.

John P. Hart
Title: Vice Pres - CFO
Company: Nova Pressroom Products, LLC
(Vice Pres - CFO, Nova Pressroom Products, LLC) |

I've overseen this process in companies from tens of commissioned sales folks, to one of almost 500 commissioned sales reps.

Clear rules, a good process, and final review is what is most important. The less manual the process the better.

It's not as much who does it; but how and why the process was designed and implemented. OK for it to start in the sales department, review signed off by someone with senior sales responsibility, and an audit check by finance/accounting before payments are authorized.

Deviations to SOP is typically a challenge. So, it also must be clear who can override and authorize exceptions, bonus payments, excess draws, etc. Then that person must be held accountable for their decisions. If the Sales Manager, VP Sales, etc. can routinely override the established process with impunity, there will be challenges!

Topic Expert
Malak Kazan
Title: VP, Special Projects
Company: ERI Economic Research Institute
(VP, Special Projects, ERI Economic Research Institute) |

I would add it is typical for Sales folks to do "shadow" calculations of their commissions. One way to address the issue is to create a tool to calculate the commissions (could be a "protected" worksheet where they can see the formulas to calculate the commission etc) in collaboration with the sales team and possibly roll it out to them or share it with them during the commission calculation process. Credibility of the process is key.

Gary A. Pokorn
Title: Sales Enablement Manager
Company: Oracle I NetSuite
(Sales Enablement Manager, Oracle I NetSuite) |

Pardon the opinion vs. offering an answer, but as a sales professional with over three decades of experience I'm always filled with wonder and amazement on why companies want to create a complicated commission program to begin with? Good luck. Thx, GAP

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

I agree. The more complicated the more room for (not in any order) :

Errosr in calculation
Dispute as to classification
Stratification of the Sales Force
More work for someone

Topic Expert
Karoline Mello
Title: Director, FP&A
Company: Apollo Group
(Director, FP&A, Apollo Group) |

Our VP of Sales handles the calculations and Accounting reviews the amounts prior to submission to HR. Over the past three years we have moved from a complicated process that is relatively simple and the system run reports for each individual is used with close to no manual calculations. When we examined our method of providing different percentages for different product mixes versus paying one common percentage we were off by dollars, not thousands of dollars. Not we have a straight percentage system and system generated commission report and it is so much more accurate, reliable, and efficient.

Topic Expert
Bob Stenz
Title: Controller
Company: Silicon Valley start-up
(Controller, Silicon Valley start-up) |

The model I like is the following: Sales/CEO/HR/Finance set company quotas and overlay assumptions. Sales/HR sets targeted variable compensation (...targeted variable compensation is reviewed in total by Finance to ascertain it's within budget). HR/Finance prepares the commission rules and plans (plans are essentially a formula of variable comp and quota. It's critical that all deals allocated to a rep are included in the rep's quota). Finance administers commissions (...commissions often require spreadsheet modeling beyond the capability of Sales, control over who gets paid on a deal is also important). Who gets paid on a deal often needs to be solicited from Sales, but Finance needs to ascertain all those participating in a deal were given quota for the deal. In my experience, administering commissions (calculation, statements, Q&A) can take a 1-3 days over the span of 1-2 weeks. NOTE: The aforementioned does not take into consideration the use of commission service provider like Xactly.

Topic Expert
Patrick Dunne
Title: Chief Financial Officer
Company: Milk Source
(Chief Financial Officer, Milk Source) |

Our commissions are calculated by accounting. We are a bigger company, but I have never seen this calculated by sales or HR. From an internal controls perspective, you need to keep this in accounting. You don't want someone influencing the calculations in sales and you really want to prevent any potential wrongdoing. Like you, we have multiple tier payouts for brokers and reps. It probably takes our person half a day to calculate commissions.

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