So most of you are well into the first quarter of your fiscal year. Quota’s have been determined, commission rates have been calculated, corporate goals have been established and all of this has been verbally communicated to your sales representatives. However, most of the sales reps are thinking:
how am I actually going to be paid? what really is the structure for the variable portion of my pay and how is it calculated?
Great questions and there should never be any doubt as to how you are going to be paid. Period. So if your company hasn’t provided you with a letter or memo that outlines as such demand it!
But before we get into what should be documented with regards to your commission structure let’s review what should be in an employment agreement and what is in a commission memo.
Generally, your employment agreement should include:
- when do you start, what title and who you will report to
- what is your rate of pay and frequency (e.g. semi-monthly), potential bonuses and “on target earnings” if applicable.
- benefits (e.g. weeks of vacation, health, dental, stock options, etc.)
- what happens in the event of termination (both parties)
- duties and responsibilities expected of you (at a high level and always subject to change)
- confidentiality agreement/clauses
For sales representatives on target earnings (”OTE”) is important. Your employment agreement will document your base pay (e.g. what you will receive regularly that is not dependent on the amount of sales you make); as well as an OTE which implies that if you hit the targets the company has set for you your annual pay will be base pay plus incentive pay (or commission or variable pay) which will equal the OTE amount in the employment agreement. An example of this might be the following two bullet points in your employment agreement:
5.1 Your rate of annual base pay is $50,000 and will be paid semi-monthly, subject to source deductions and other deductions required or agreed to.
5.2 In addition to your base salary you will be entitled to sales incentive compensation, subject to source deductions and other deductions required or agreed to, as outlined in your annual Commission Structure Memorandum in effect from time to time. Should you reach your targeted goals as outlined in your Commission Structure Memorandum, it is anticipated that your sales incentive compensation would amount to $60,000 therefore your anticipated annual on-target earnings would be $110,000.
Your employment agreement will not include the commission rates for your incentive compensation as it will change every year, along with your quota assignment. These items are in the Commission Structure Memorandum or “Letter” along with items such as:
- the term the memo is for (e.g. fiscal year)
- how quota credit will be granted, when payment will occur and the affects of foreign exchange
- are calculations based on cash received, invoice amount or revenue recognition?
- the quota assignment by quarter, by category (e.g. regional, individual/team, direct/channel, licenses/services, etc.)
- the commission rates and if there are any accelerators or bonuses
For further clarification, in addition to the Commission Structure Memo, I also like to provide a ‘calculator’ that allows the sales rep to do ‘what if’ analysis to see how much they can potentially earn under different scenarios. Nothing like dangling a carrot every now and then.
If you are looking for an example for a commission letter or memo Business Ready has just published a sample Memo for Commission Structure that will point you in the right direction and provide clarity to your sales representatives. There is no faster way to lower morale than not providing clarity over how someone is going to get paid. Let’s try to prevent that.