Designing Compensation Systems for Sales Professionals

Overview

Incentive compensation programs stem from the principle identified in the theory of operant conditioning that if one wants a particular behavior to occur or continue, one should reward it, and that if one wants a behavior to cease, one should ignore it or punish it. Incentive compensation programs enable organizations to produce targeted results by rewarding employees who are responsible for those results. Nowhere is this principle better illustrated than with sales compensation programs, where the efforts of sales representatives contribute directly to the company's bottom line.

The main purpose of a sales compensation plan is to motivate sales professionals to achieve specific objectives that directly translate to the organization's bottom line.

This toolkit discusses issues organizations face when designing and administering compensation plans for sales professionals. Topics presented include the following:

• Requirements of compensation plans.
• Definitions of terms relevant to compensation systems.
• Measuring the effectiveness of a compensation plan.
• Using technology to automate variable-pay processes.
• Methods such as commissions and bonuses used to motivate sales professionals.
• Steps in designing compensation plans, including identifying the planning team, setting goals, defining sales roles, incorporating market data, determining plan eligibility and setting a total target compensation/compensation mix.
• Sales compensation formulas.
• Establishing territories and performance measures.
• Legal issues surrounding compensation systems.

Pay for performance requires extensive planning, monitoring and reevaluation over time. Rewarding high performers, and ignoring or punishing low performers, correlates strongly to enhancing sales incentive compensation plans.

Incentive Vehicles for Sales Compensation Plans

Commissions, bonuses, stock-based plans and prizes are the vehicles employers typically use to incentivize performance of salespeople. Each means has its own set of attributes that may make it more or less appropriate for any particular eligible job, person or organization. Many sales compensation plans commonly include a combination of incentive pay options.

Commissions and bonus payments are most common while stock options can be a retention tool for high performers and managers.

See What is the difference between a discretionary and a nondiscretionary bonus?

and What are the components of a commission-only sales plan? Can we pay employees commissions only?

Planning for and Designing a Sales Compensation Program

Several factors go into designing a sales incentive compensation plan. Because sales compensation plans are defined by the measures, mechanics and policies identified for each sales role, employers should take the following questions into consideration when planning and designing a compensation plan.

Seven Questions to Ask 

1. Will the plan be a salary-and-incentive plan or a salary-only plan? If it is a salary-and-incentive mix, what percentage will be assigned to each component of the total targeted income (TTI)?
2. Will the plan be commission-only or salary-plus-commission?
3. Will incentive earnings be expressed in dollars or as a percentage of base salary or revenues generated?
4. How will the employer ensure that the plan meets the organization's financial criteria?
5. Does the plan meet the needs of the entire company?
6. Is the plan competitive within the marketplace?
7. Does it allow for continued business growth and increased profits?

After the organizations answers the questions above, planning and designing the plan may begin. 

A 12-Step Plan for Designing Sales Compensation Programs

• Select and establish the design team.
• Determine the reasons for implementing or changing incentives.
• Obtain input from stakeholders, field sales management and sales representatives.
• Align the overall sales strategy with the business strategy and objectives.
• Understand job role and content in the selling process. Identify critical success factors for each sales job. Identify relationships between marketing, sales and service.
• Assess pay competitiveness. Understand labor markets, pay levels and practices.
• Build the plan structure. Target pay levels and determine types of incentives and appropriate mix/leverage, performance measures and weights.
• Consider eligibility, total target cash, mix and leverage for each role.
• Model the overall program costs and prepare individual estimates of payouts based on sales and performance levels.
• Set quotas for each performance measure and allocate to the organization and job based on territory potential and performance.
• Review and approve sales plans by key stakeholders and the CEO. 
• Develop and execute a timeline for rolling out the program, communication, training, system changes and implementation.

Understanding Goals and Objectives

Goals are the foundation of sales compensation plan design. Most organizations follow a top-down approach to goal setting. Regardless of the approach an employer uses, the goals must be clear, attainable and measurable.

Although most companies partially base their goals on revenue, using a more granular or specific approach when setting goals is advisable.

Using Market Data

Offering a competitive compensation package ensures the employer's ability to recruit and retain top sales employees. Salary surveys for sales employees report base pay, target pay at risk (variable), total target compensation and actual total compensation at various levels of achievement. Only those salary surveys specifically designed for sales functions provide the necessary data to identify market competitive midpoints, develop pay structures and compare sales practices of contemporary organizations. See SHRM Compensation Data Center.

In addition to compensation consulting firms, occupational and salary data are also available from the Bureau of Labor Statistics.

Equipped with market data, an organization can successfully establish pay ranges for each role and identify the target salary, commissions, bonuses and other incentives needed to keep sales operations competitive.

Base pay and target variable ratios can be extremely useful tools for comparing the pay mix of similar sales roles. Average total target compensation (TTC) can be compared with the organization's midpoints for similar roles in the organization. Actual total compensation is used to compare the percentage of TTC earned for various levels of achievement.

Plan Modeling

Given the divergent needs of varying departments and divisions, it is a good idea to design a few different plans and to test them against what-if scenarios to ensure the plan meets the organization's business needs. Ascertaining how various levels of sales outcomes will affect the total commission budget is crucial. Modeling a variety of plan changes, such as commission rates, thresholds, accelerators and performance distribution, enables sales operations to design the most effective plans. Modeling can also be used to test new compensation plans to ensure they are error free before the employer actually implements the program.

Eligibility

One of the first steps in designing the sales incentive plan is to determine who will be eligible for participation. The plan should clearly state which job titles or roles will be eligible. These sales jobs should be the ones critical to the organization's growth and success. Generally, only those roles involving direct customer contact—responsibility for persuading customers to purchase products or services—should be eligible for the sales incentive plan. The two principal factors to consider when determining eligibility are the degree of customer contact and the degree of persuasion to buy services or products.

Determining eligibility is harder in team-selling situations. Some team members may directly influence the sale, whereas others, such as sales support or marketing, may have an indirect role. The key questions to ask when considering sales support roles for eligibility in the incentive program are the following:

• Does the role significantly contribute to the success of the sale by influencing the product or service?

• Does the role contribute to ensuring the customer stays with the organization?
• Who is the primary contact during the selling process?
• What is the principal activity/role of the position?
• What is the type of sale?

Setting Total Target Compensation/Compensation Mix

For the most part, sales people are usually compensated with a mix of fixed earnings—their salary—and variable earnings—their commissions and bonuses. The plan should be designed to provide a greater portion of the total compensation mix through commissions in which sales representatives have a greater level of influence over the buying decisions of customers. Base salary should comprise a greater percentage of the mix when sales representatives do not exert much control over customer buying decisions. Most businesses selling high-value services opt for a ratio of somewhere between 60 percent/40 percent and 80 percent/20 percent of fixed-to-variable. The plan stands a greater chance of success when participants believe that the plan is competitive and that it provides appropriate levels of compensation for extra effort.

Factors to consider in setting the compensation mix include the following:

• The degree of influence the salesperson has over the customer's buying decision.
• The mix of new business to account development.
• The sales cycle in the business.
• The behaviors one wants to encourage—a high variable component may lead to aggressive selling, whereas a low variable component may lead to complacency.

Territories

Territories for sales employees can be set up in many different ways, but a sound approach provides sufficient sales coverage for the most advantageous sales with the lowest possible cost.

• Balanced configuration. Each territory has a comparable number of new and existing customers and comparable potential revenue from each territory. This process works well when customer locations are equivalent distances from each other in each territory. This approach may not work well if customers in some territories are clustered closely together, maximizing accessibility and available selling time for the sales rep, whereas in other territories, customers are more distant from one another, limiting available selling time due to time spent traveling.
• Size configuration. In this territory configuration, large, medium and small customers are grouped together with different teams of sales reps handling each category.
• Industry configuration. Sales reps become specialists in understanding the needs of customers in a specific industry.
• Sales process configuration. This configuration classifies customers as either existing customers or potential customers.

Depending on the industry, size of the organization, experience of the sales employees and other factors, organizations may use a variety of other approaches to configure territories.

When analyzing results at the end of the plan year, territory assignment may be found to be the cause of some abnormalities in the pay-for-performance data.

Performance Measures

The key to a successful sales incentive plan is understanding the performance objectives for each role and how they support the overall business strategy. The rule of thumb is to use three or fewer performance measures. Sales professionals can easily lose their focus if they are expected to perform against a set of performance measures that is too broad.

Employers set individual or team-based performance measures as appropriate for each role. These measures compel the types of selling behaviors that best align with the organization's goals. It is through such plan measures that companies transform their corporate goals into desired selling behaviors.

Common performance measures include the following:

• Revenue. The most common measure used. This measure has a very strong link to business results.
• Sales volume. Measures the number of units sold.
• Profit-based measures. Help salespersons focus on managing expenses as well as on sales. Profit-based measures are best applied to each territory rather than just at the corporate level.
• Market share. A good measure. However, accurate data to measure it can be difficult to obtain.
• Customer satisfaction. A great measure to ensure a customer-focused sales force. However, obtaining and measuring results can very difficult.

Other considerations for determining the appropriate factors on which to base the sales compensation plan include the following:

• Making sure clear alignment exists between the sales employee's objectives and organizational goals.
• Tying each metric in the sales incentive plan to a result that the salesperson can influence or control. If management decides when to accept orders with lower margin, it should not measure the sales employee on achieving a certain margin percentage, which is unfair and may lower the sales representative's motivation.
• Avoiding tying compensation to measures that cannot be reliably and efficiently tracked. The best sales incentive plans trigger payment associated with a desired result with as little lag as possible.

On each performance measure selected, the performance standards should not be set so high that they are unattainable. Similarly, they should not be set so low that achieving them is a given. If standards are set too low, the compensation associated with their achievement basically becomes part of the base pay program.

Organizations should link performance measures so that sales employees do not sacrifice one measure to meet another. Linking measures communicates management's priorities and sends sales employees a stronger and clearer message.

Lastly, once the measures have been determined, the next consideration is weighting them. The weighting of the performance measures communicates the priorities and, thus, the focus of the sales force.

Documenting and Communicating the Plan

Communication can occur through newsletters, bulletin boards, regular meetings, mailings, video presentations, check stuffers, lunchtime discussions and interactions between the various stakeholders. Communications may include the following:

• Seeking input from employees as to how sales compensation plans should be designed in terms of territory, quota and the like.
• Advising affected employees of the parameters of the incentive plans adopted through written compensation plans and meetings.
• Conducting post-plan interviews of current sales employees and exit interviews of departing sales employees.
• Advising upper management of the state of affairs on an ongoing basis and near the end of the existing incentive compensation plan.

The failure of many sales compensation programs can be linked to failures in the communication process:

• Failure to obtain employee input in programs that will actually incentivize performance in the way sought by the employer.
• Failure to state performance goals clearly up front.
• Failure to state performance goals that are within the scope of influence of the target employee.
• Changing performance standards midstream.
• Judging employee performance according to standards that were not stated in written documentation.
• Providing job descriptions that do not reflect the goals set forth in the sales compensation plan.

To ensure trust and confidence in the compensation process, organizations need to have clearly developed policies and practices for credits, adjustments, liabilities, windfalls and so forth.

A clearly written and communicated policy answers questions such as the following:

• Which sales transactions will be included in determining commission-based pay?
• Will credits be shared, and if so, how?
• What rules are in place regarding recoverable draws or commission adjustment liabilities?

Once the plan has been designed, the organization needs to communicate to participants how they will be measured and rewarded for sales and to ensure they understand and accept the terms of the plan. Communicating current progress both within the sales team and to other stakeholders is critical to a plan's success because it provides the appropriate recognition for top performers and puts pressure on nonperformers.

Many employers create and distribute plan documents containing the terms and conditions of the plan, along with individual content describing participant quotas, commission rates, draws and so forth. The sales compensation plan should be available and distributed to the sales force at the start of the sales period.

The sales compensation plan is a key sales management document that should include the following elements:

• A summary of the organization's sales strategy, objectives and what the business is trying to achieve.
• The performance indicators being used and how they are being measured.
• A description of exactly what sales commission will be paid for what results and any considerations (such as multipliers) that apply.

A description of how the employer will resolve any questions or conflicts that may arise.

Metrics

As with any effort to improve organizational performance, metrics are key. The metrics methods adopted should establish a baseline of where the organization is before the changes are applied and also measure the results on the same scale at the end of a specific time period.

A disciplined method of gathering and analyzing data concerning the effectiveness of incentive compensation programs is critical. This step includes both qualitative and quantitative methods to assess plan performance against the intended design and behaviors. Any deviations from what is expected should be properly communicated to key stakeholders. Principal drivers of plan deviations must be understood so that they can be properly addressed through plan modifications. Many organizations use qualitative assessments of compensation plans. However, quantitative assessments, such as stress testing, are important in helping employers understand trade-offs between risk and reward embedded in the compensation plans.

There is a continuous cycle in any performance plan: developing and modifying the plan, communicating and implementing the plan, and assessing plan performance and risk. Then the cycle starts again. See Employers Adjust Pay and Incentives Amid Economic Turmoil.

Technology

Enterprise incentive management (EIM) technology, a category of software and services for automating variable-pay processes, can be a powerful behavior modification tool as well as a means of furthering HR's role as a critical business partner. EIM analyzes, tracks and pays bonuses, commissions and other types of variable compensation. It collates data from various systems to provide management with a comprehensive picture of payout versus performance, and it does it more efficiently than unwieldy manual entry systems. EIM's early roots began in sales compensation management, where it has long been harnessed to automate calculations, taking into account commissions, accelerators, quotas and special promotions. Such calculations can be cumbersome and can result in high spreadsheet-error rates, once a sales force expands beyond a handful of individuals or commission system variables multiply. EIM automation makes it possible to rapidly generate and analyze compensation reports more efficiently than manually digging through numerous files to find and compile figures. EIM software can be used in-house or outsourced.

Administering and Evaluating the Plan

At the end of the design process, the sales compensation plan should include such factors as base salary ranges, a mix of base salary and incentive earnings, incentive earnings only, and total cash compensation based on achieving measurable business objectives.

Organizations must also evaluate the plan over a period of time to determine if it continues to drive desired sales behaviors and goals. However, management must keep in mind that the sales compensation plan by itself cannot guarantee an organization's ultimate success. Ongoing coaching, motivating and employee-development activities are equally vital to the plan's success.

Evaluating effectiveness

Ongoing analysis of actual versus modeled results in terms of both cost and revenue ensures that compensation plans remain effective and affordable. If necessary, organizations should adjust their plans midyear or in response to critical external or internal changes, such as new competitive offerings, mergers and acquisitions, major regulatory industry changes or the introduction of new products. Translating plan modifications into selling behavior requires companies to diligently communicate any plan changes to the sales team.

Employers also need to regularly measure team and organizational performance against the plan and be prepared to make any necessary adjustments. In general, a plan's structure and policies should not be changed more than once a year. However, plan variables may need to be adjusted to course-correct the sales team. Organizations need to identify what works and what does not work in existing plans and to use this information in designing new plans.

When evaluating a plan's effectiveness, asking questions such as the following is helpful:

• Do sales employees understand their compensation plans? Do the plans clearly state what is expected and how performance will be measured and rewarded?
• Are sales territories balanced?
• Are quotas set fairly?
• Is there a positive correlation between performance and commission earnings?
• Is sales turnover higher or lower than expected?

These questions are often difficult to answer because the systems used to manage sales compensation do not easily support plan analysis. An effective practice element in plan design is to use the analytics capabilities of automated sales compensation technology solutions. See Monitoring Sales Compensation Can Keep It on Track.

Legal Issues

Designing and managing sales compensation programs present several legal issues. For the most part, the legal issues depend on the following:

• The type of the incentive (whether money-based, stock-based or prize-based).
• The status of the employee as exempt or nonexempt under the Fair Labor Standards Act (FLSA).
• Whether the incentive plan comes under the Employee Retirement Income Security Act (ERISA) as a pension benefit plan or welfare benefit plan.
• Making changes to plans before their planned expiration.

Depending on the foregoing legal breakdown, several practical questions may arise:

• Is the particular form of compensation taxable to the employee? If so, at what tax rate?
• Is the reward deductible to the employer?
• Is the employer required to withhold for employee-owed taxes?
• Is the reward to be included as part of the employee's "regular pay" for purposes of calculating overtime?
• What kinds of communications are mandated to the employee regarding the plan?
• What kinds of communications are mandated to the IRS regarding the plan?
• What kinds of communications are mandated to public shareholders regarding the plan?

See:

Must an employer pay out a bonus to a terminating or already terminated employee?

How should employers handle commission-based pay when employees are on FMLA or extended leave of absence?

Are bonuses taxable?

Fair Labor Standards Act

The FLSA contains an exemption from the payment of both minimum wage and overtime pay to outside sales employees "who sell their employer's products, services, or facilities to customers away from their employer's place(s) of business, in general, either at the customer's place of business or by selling door-to-door at the customer's home," as defined by the Regulations, 29 C.F.R. §541. To determine overtime eligibility for sales employees, employers must compare the functions contained in the employee's job description against the FLSA duties tests for the outside sales exemption. See Understanding Overtime Exemptions Under the FLSA and DOL: Fact Sheets by Exemption.

Some employees performing inside sales work in certain retail establishments may be exempt from the overtime pay protections under FLSA §7(i). See DOL Streamlines Overtime Rule for Commission-Based Retail and Service Workers.

Drivers who deliver the products they sell may or may not meet the duties tests for exemption as outside sales employees. Accordingly, overtime and minimum wage rules may apply to certain sales employees.

State wage payment laws

State wage payment laws generally define protected "wages" and set forth the procedures an employer must follow when compensating employees.

Although the various state laws generally include commissions among the wages subject to the statutory requirements, the laws themselves do little to answer questions that may arise about such matters as the following:

• How is the commission calculated?
• When is it earned?
• When must it be paid out to the employee?
• What obligation, if any, is there to pay out commissions upon termination of employment?

See:

How do we handle outstanding commission payments for an employee who is leaving the company?

Texas Supreme Court Clarifies Standard for Payment of Commissions When Agreement Is Silent

California Commission-Based Financial Advisors Entitled to Overtime Pay

The best way to avoid disputes over commissions is to create a clear written agreement. This agreement may be part of a broader employment agreement or may be a separate commission plan, which the employee signs. This document is the contract between the organization and the employee regarding the specifics of sales incentive pay. The agreement should be clear about a number of factors to avoid any ambiguities that may later give rise to litigation. See Commission Sales Agreement.

Sales Compensation Glossary

HR professionals who have any responsibility for a sales compensation plan should acquaint themselves with the lexicon of the field, including the following:

• Accelerator. A commission multiplier or commission rate higher than the standard commission rate paid on sales over a preset threshold, typically 100 percent of quota.
• At-risk pay. Variable portion of one's total target cash compensation. Determining the amount of pay at risk is directly related to the sales role. Generally, the greater the responsibility for the salesperson to persuade the customer to buy, the higher the pay at risk should be as a percentage of TTC. See also the terms "target incentive compensation" and "variable compensation."
• Base salary. Fixed portion of one's total cash compensation.
• Bluebird or windfall. Compensation for a sale that was made with little or no effort or influence by the sales representative. Depending on the size of the payment, many employers either exclude or reduce the amount from normal incentive compensation payments as described in the sales plan.
• Bonus. An award based on the performance of an individual for accomplishing objectives or specified performance goals. Planned bonuses are commonly expressed as a percentage of base salary, a percentage of target cash or incentive compensation, or a fixed dollar amount.
• Cap. The maximum cash compensation an employee can earn on a sale in a given earnings period or in a plan. Some employers may include a provision in the plan that caps the commission percentage a sales employee earns at a maximum level but allows earnings to continue past any type of maximum. Another option is to document special handling for unforecasted orders over a certain dollar amount.
• Commission formula. There are two types of commission formulas: 
  • Flat. The commission percentage is constant regardless of the amount of sales or revenue the salesperson achieves. Although few employers use a straight commission, it may be appropriate in situations when there is minimal seasonality in the product or services sold, when high turnover is expected in the sales force, when there is not a need to control a salesperson's earnings to a certain level and when very few factors other than selling skills are required to achieve the expected sales levels.
  • Variable. The commission rate may fluctuate up or down depending on performance or the measurement used. A variable commission rate may also include accelerators or decelerators between major points. Accelerators or decelerators are used to motivate a salesperson to continue to achieve a higher level of a metric.
• Commission rate. Percentage paid to the salesperson on the business he or she generates.
• Draw. Advance against future anticipated incentive compensation earnings. There are two types of draws: recoverable and nonrecoverable. In both instances, if the sale produces incentive amounts in excess of the draw, the sales representative receives additional monies beyond the draw amount. See also the terms "recoverable draw" and "nonrecoverable draw" below.
• Excellence performance level. The outstanding level of performance for which the defined upside leverage is earned (typically 10 percent of the sales force population).
• Farmer. This type of salesperson focuses on retaining and growing the account. Farmers spend the majority of their time on the post-sale effort identifying and addressing customer needs. The pay mix for these roles usually reflects a higher base salary and a lower percentage of pay at risk.
• Full leverage incentive compensation. Incentive opportunity for excellence performance, typically defined as the 90th percentile.
• Gate. A sales plan design element that incentivizes the sales representative to focus on more than one performance measure. For example, accelerated commission is not paid until the quota is met and a certain mix of product sales is attained.
• Guarantee. See the term "nonrecoverable draw."
• Hunter. The salesperson typically seeks new business, which involves cold calling and prospecting. The role can be either transactional or consultative depending on the type of sell. The pay mix for these roles usually reflects a lower base salary and a higher percentage of pay at risk.
• Individual sales incentive plan agreement. The contract between the employer and the employee regarding the specifics of sales incentive pay.
• Leverage. The multiplier of the variable target that is typically earned by the top 10 percent of performers in a role.
• Linked plan. A sales compensation design that links one performance measure to another, usually opposing, measure. For example, a common linked plan ties payout to revenue and profit margin.
• Multipliers. A common tool in sales compensation plans typically used in two ways: Performance over a specified level is rewarded at more than the basic rate. Performance below a level is rewarded at less than the basic rate. This is common when a "run rate" of business is expected to happen with little sales intervention, which is often found in "account management" situations.
• Nonrecoverable draw (guarantee). A compensation payment made in addition to base salary regardless of performance. Typically given to sales representatives who are either new to the organization, position or territory (for ramp up). Temporary in nature and usually lasting a few months and no more than one year. If the incentive earnings do not exceed the draw amount, the individual does not owe monies to the employer.
• On-target earnings (OTE). Targeted annual cash compensation level, comprising the base salary plus the TTC. OTE is the term commonly used outside the United States. See also the term "total target compensation."
• Quota. Performance measure related to dollars or units to be sold in a measurement period. Quotas are typically set so that approximately 70 percent of the sales force will meet or exceed quota and about 30 percent will not. It is important to test the quota setting process at the end of each plan year to ensure its reliability. If more than 70 percent meet or exceed quota or more than 30 percent do not meet quota, quotas are being set too low or too high.
• Recoverable draw. A compensation payment made as an advance against future anticipated incentive compensation earnings. Typically given to individuals to ease cash flow between incentive payouts. If the sales representative's earnings are less than the draw amount, the individual must return the amount of the draw not earned to the employer.
• Sales crediting. The term used to count a sale for compensation purposes.
• Sales cycles. If closing a complex sale takes months or years, the base salary will generally be a higher percentage of total target compensation to provide adequate cash flow for the salesperson.
• Steps. A plan design element that drives continued sales productivity after the quota has been achieved. It is common to have a step at 100 percent of quota and subsequent steps at 110 percent and higher.
• Target incentive compensation. Variable portion of one's total target cash compensation. See also the terms "variable compensation" and "at-risk pay."
• Target performance level. The expected level of performance (e.g., 100 percent of goal). Typically 50 percent to 70 percent of sales force population.
• Target total compensation (TTC). Targeted annual cash compensation level comprising the base salary plus the target incentive compensation. See also the term "on-target earnings."
• Territory. A predefined geography, industry or set of accounts for which a sales representative has responsibility.
• Threshold performance level. The minimum level of performance for which an incentive is earned. There is no threshold performance level on plans that pay on first dollar sold. Typically 95 percent of the sales force population will meet this threshold.
• Variable compensation. This is the variable portion of one's total target cash compensation. See also the terms "target incentive compensation" and "at-risk pay."

Sales Compensation Formulas

A variety of sales compensation formulas can be used, depending on the particular circumstances.

TTC when base and mix are known

To calculate TTC, divide base salary by the percentage of pay related to base salary in the pay mix. Example: base = $90,000; pay mix = 60/40. Calculation: $90,000 / .60 = $150,000.

TTC when variable and mix are known

To calculate TTC, divide variable target pay by the percentage of pay related to the variable target pay in the pay mix. Example: variable target = $60,000; pay mix = 60/40. Calculation: $60,000 / .40 = $150,000.

Base salary when TTC and pay mix are known

To calculate base salary, multiply the TTC by the percentage of pay related to base salary in the pay mix. Example: TTC = $150,000; pay mix = 60/40. Calculation: $150,000 x .60 = $90,000.

Variable target when TTC and pay mix are known

To calculate the variable target, multiply the TTC by the percentage of pay related to target variable in the pay mix. Example: TTC = $150,000; pay mix = 60/40. Calculation: $150,000 x .40 = $60,000.

Calculating individual commission rate

To calculate an individual commission rate for an individual so that 100 percent of quota attainment results in payment of 100 percent of the variable target, divide the variable target by the quota. Example: Variable target = $60,000.00; quota = $3,000,000. Calculation: $60,000 ÷ $3,000,000 = 2 percent individual commission rate.

Additional Resources

Designing and Managing Incentive Compensation Programs

Designing Executive Compensation Plans

Sales Commission Policy: Timing and Manner of Payment

Commission Incentive Plan and Payout Schedule

Commission Sales Draw Agreement

Commission Sales Agreement

We have full time employees who are paid 100% commission. How do I calculate the rate of pay they are paid when they take paid time off?

FLSA Exempt/Non-Exempt Questionnaire

FLSA Exemption Questionnaire