Ask the Accounting Community

Hi Kim,

There can be multiple factors applied like contributions on the sales they bring in, collection, overall company performance etc. It depends on your industry you are working in but should be competitive and challenging enough and should be a motivating factor. 

Regards/ Amit

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Amit Sharma
Group Financial Accountant
SPP Pumps Ltd.
Reading
England-United Kingdom
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Original Message:
Sent: 05-05-2021 09:33 PM
From: Kim Shultz
Subject: Sales Commission

The company I work for is looking to revamp the way Sales Commissions are paid monthly.  The current calculations are based on a percentage of total revenue of Salesman's customers sales minus a set base amount.  We are also looking at rating sales on the number of new customers brought in per quarter or yearly.

Any thoughts or input on how other companies calculate commissions and what they are based on?

Thanks for your help.

Kim Shultz

Accounting Manager

West Reading, PA

United States

Sales Commissions--Now you have the sales force's attention!

I do have several personal bias about sales commission structures.  Let me share a couple here:

While commissions are based on "Total Revenue", probing a bit:

Is this really "Net Revenue", with adjustments for sales allowances, returns and bad debts reducing the Revenue amount from which commissions are calculated?  If not, should be!

Are there commission rate differentials for contribution margins of sales?  If not, there should be.

"We are also looking at rating sales on the number of new customers brought in per quarter or yearly."  You will get what you measure, or in this case, where the $$$ is! The most profitable customers are your repeat customers.  Generic growth comes about with your present customer base, providing the goods and services they are looking to you to be the preferred provider.

I have nothing against efforts to attract new, growing customer basis.  But this type of commission structure presents a bias of preference for new customers over your current customer base.  In my experience, I would:

*Commissions on "Revenue" (Net Revenue, if there are write offs, adjustments or bad debts, the sales people need to have "skin in the game" and prioritize good customers over any customers).

*Commission rates should be tied to profitability, contribution margins.

*Be careful of targeting greater commissions on a particular group where as it may be at the expense of other customers.  Preferring new customers over present, loyal, usually most profitable customers can lead to undesired outcomes.  (See second bullet).   The old days of the "sales contest" of new business proved rift of gamesmanship at the expense of core business. 

Should you have two sales people who have equal sales and equal sales growth, greater compensation on new business (new business is inherently more expensive to "fill" than ongoing customers) we are inherently rewarding less profitable results.

I am not biased against new business, it is critical to our ongoing success.  Again, in my experience, the new business will come in the environment of dealing with all customers optimally.  Every sales person will be aggressive and welcome new business as part of their overall portfolio.

​

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Charles Krueger CGMA, CPA
Academic
Sun Prairie WI
United States
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Original Message:
Sent: 05-05-2021 09:33 PM
From: Kim Shultz
Subject: Sales Commission

The company I work for is looking to revamp the way Sales Commissions are paid monthly.  The current calculations are based on a percentage of total revenue of Salesman's customers sales minus a set base amount.  We are also looking at rating sales on the number of new customers brought in per quarter or yearly.

Any thoughts or input on how other companies calculate commissions and what they are based on?

Thanks for your help.

Kim Shultz

Accounting Manager

West Reading, PA

United States

The last company I worked for had commissioned salespeople.  When I started working there, the salespeople were strictly salary based.  When a commission program was initiated, it was done as follows:

A quarterly profit margin for salesperson was determined, based on the contribution margin for their sales for the quarter.  Then, 20% of that proft margin was compared to their salary.  If the 20% of their profit margin was higher than their salary, they would receive a quarterly commission bonus equal to the difference between those two figures.  If the 20% of profit margin was lower than their salary, they would not receive a bonus check, and the difference was held over to the next quarter and withheld from any commission they would earn for that quarter.

We found it to be a great motivator for those who routinely earned a commission, while simultaneously helping to identify the salepeople who needed help and/or training so they could become more profitable and overcome their withheld amount and start earning commissions.

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Brian Sadovsky
San Antonio TX
United States
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Original Message:
Sent: 05-05-2021 09:33 PM
From: Kim Shultz
Subject: Sales Commission

The company I work for is looking to revamp the way Sales Commissions are paid monthly.  The current calculations are based on a percentage of total revenue of Salesman's customers sales minus a set base amount.  We are also looking at rating sales on the number of new customers brought in per quarter or yearly.

Any thoughts or input on how other companies calculate commissions and what they are based on?

Thanks for your help.

Kim Shultz

Accounting Manager

West Reading, PA

United States