A Basic Guide for How to Calculate Commissions

by | Apr 29, 2024

Commissions are the lifeblood of any sales team. They help motivate your team to perform their best, so ensuring that your commission calculations are accurate is crucial to maintaining that motivation. For simple commission plans, many organizations can use Excel spreadsheets to track and manage commissions. As commission plans grow more complex, we definitely recommend switching to a commission automation platform like Core to save time on tedious and complex processes.  

However, for those simpler plans with only a handful of payees and straightforward commission rates, we’ve outlined a basic guide for how to manage your commissions with confidence.

How To Calculate Commissions

  1.     Gather Necessary Data

The first step with any incentive compensation calculation is to make sure that you have all of the data needed to ensure accurate calculations. Most commission plans are based on multiple data points. By no means is this an exhaustive list, but at a very basic level, the types of data usually needed include:

  • Sales data such as revenue, profit, and number of deals closed.
  • Customer data like customer type, product purchased, and whether they are a returning customer or a new customer.
  • Employee data including how long a rep has been with the company, their individual sales goals, and past sales for attainment tracking.

The data needed to calculate commissions may be in several different places, which is inevitable, especially as your business grows. With Core, you can automatically sync your data from any secondary application, or import as much data as you need in any file format. Our system can track what data is needed for commission calculations, and if you are ever missing pieces of data prior to running a cycle, Core’s system will alert you ahead of time, saving you countless hours of reconciliation or payment correction down the line.

  1.     Determine Commissionable Income for Each Sales Rep

Once all of your data has been collected, organized, and consolidated, it’s time to start working through the steps of your commission plan. This starts at a high level by determining the commissionable income for each sales rep. Most often, this will be the total revenue generated from their sales minus any adjustments. However, some companies may base commissionable income on profit margin rather than total revenue. Your company’s method for determining commissionable income should be outlined in your commission plan.   

If you have different rates for certain products, you will want to delineate how much revenue a rep has made off of each product.

  1.     Confirm Commission Rates

Next, confirm the commission rate for each sales rep. With an easy commission plan, your sales rep may have one commission rate that is applied across the board, meaning regardless of what they sell, the commission rate will be the same. As commission plans become more complex, there may be varying commission rates based on the product sold, their individual quota attainment, contract renewals, etc.

This is where it will come in handy to categorize your rep’s revenue by product type before applying commission rate.

  1.     Adjustments

Before moving on to the actual calculation, you’ll need to determine if any adjustments are needed for your sales reps. Adjustments may include anything from commission splits between sales reps, hierarchical overrides where a manager receives a portion of a sale, or any other variables that will need to be accounted for. Make note of these as it will modify the total amount a sales rep makes in the calculation step.

  1.     Calculation

After all the previous steps have been completed, you are cleared to move on to the actual commission calculation for each sales rep. Take the commissionable income for each sales rep and multiply it by their applicable commission rate or rates. Review the sales made by your reps throughout the month to determine if any adjustments are needed and modify your calculations accordingly.

Compensation admin pores through sales data to calculate commission pay for sales reps.

Commission Calculation Examples

Revenue-Based Commission

Example: A salesperson has a 10% commission rate. Over the course of the last commission cycle, they have generated $25,000 in revenue. Their commission calculation would be $25,000 x .10 = $2,500.

Profit-Margin Commission 

Example: A sale generates $20,000 in revenue, but the total profit is only $10,000. With a commission rate of 10%, the commission would be $10,000 × 0.10 = $1,000.

Multiple Commission Rates

Example: An insurance sales rep has a 5% commission rate for any new policy signed and a 3% commission rate for a policy renewal. The sales rep generates $10,000 in new policies for a commission cycle as well as $5,000 in policy renewals. Their commission calculation would be $10,000 x .05 = $500; $5,000 x .03 = $150; $500 + $150 = $650 total commissions for the pay cycle.

Reporting on Commission Calculations

Once your commissions have been calculated, creating reports on the results is important not only to your leadership teams, but also to each individual employee who will likely want to see the details behind their pay. If your sales reps’ commissions are calculated at a different rate or have varying components to their pay structure, you can’t simply copy and paste the same spreadsheet for each employee without generating errors.

By using Excel for this process, you are forced to create the reports manually. Going back and forth from your master spreadsheet, to each rep’s individual spreadsheet and even their past performance reports for tracking, is extremely time-consuming and leaves numerous opportunities for mistakes to be made. Even if you are able to easily calculate your commissions with a traditional spreadsheet, creating all the necessary reports for your team is very difficult to execute with Excel.

Core allows you to generate any type of performance report instantly. In fact, to take the stress completely out of creating reports for your sales reps, our online portal allows you to take a hands-off approach to making sure your employees have access to their pay details. Once you have processed the commissions, your employees can login on their own to get access to any of their performance data such as total sales, quota attainment, commission rates, and more for complete transparency.

Not only will you save time on generating reports, but your employees are far less likely to come to you with questions when they have all the information they need right at their fingertips. 

Automated Commission Calculations

While you certainly can calculate commissions in Excel, it can be extremely tedious and time consuming. If you could completely automate the process, why wouldn’t you?

Core provides an immediate 85% reduction in your administrative workload by streamlining every aspect of commission management with accurate results. Reports and analytics are created easily with our robust suite of KPIs and analytic features, allowing you to take a back seat to one of the tedious aspects of managing commissions.

Contact us or schedule a demo to see firsthand how we are able to turn commission plans of any complexity into completely automated workflows.

 

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