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How to Speak Sales Commission Management

By July 28, 2020 No Comments

Navigating the world of sales commissions without knowing the terminology is like wandering the streets of a city where you don’t know how to ask where the bathroom is: it’s frustrating.

Sales team celebrates as salesperson looks at a glass wall that's covered in sticky notes.

Once you can talk the sales commission management talk, you can recognize who walks the walk.

Luckily we speak the language of sales commission management and we’re offering free lessons. Ready to get started?

Why?

First, let’s address why knowing this language is important. Whether you’re creating sales commission rules from scratch, searching for a sales commission manager, or looking for sales commission management software, you need the right terms to get it done. Once you can talk the talk, you can recognize who walks the walk (whether that be a consultant, a potential administrator, or software provider).

We’ve put together a brief dictionary of sales commission management terms below. (You should also check out our complete guide to sales commission management.) Scroll through them and use them as a resource. If you’ve got any questions about sales commissions, maybe we can help. Drop us a line.

Sales Commission Management Vocab:

  • Accelerators: An additional incentive to salespeople who surpass their quota. An accelerator may increase commission rate for each additional milestone the rep reaches over their quota. For instance, if a salesperson exceeds quota by more than 20%, their commission rate could go from 10% to 12%. 
  • Advance: A salesperson working on straight commission may earn money against what they’re expected to earn in future commissions. This may happen if sales are projected to be stronger later in the year so that employees can expect a consistent income. Advances will need to be paid back if quotas are not met. See also Draw.
  • Amortization: When payments are spread out over a period of time, it’s known as Amortization. See also Staged Payments.
  • Bonuses: Sales organizations may offer bonuses to salespeople or managers for reaching a predetermined sales quota or goal during a month, quarter, or year. It differs from traditional commission in that it is not paid out upon a specific sale or customer payment.
  • Ceilings: A cap may be put on the amount of commission a salesperson can earn during a period of time. It’s generally called a ceiling. Some organizations may do this to set a target for sales people to reach (as well as a money-saving tactic) but if not structured right could demotivate salespeople and negatively impact sales.
  • Chargebacks or Clawbacks: When a customer cancels or ends their relationship before reaching a predetermined threshold in payment, but the sales person has already received the commission on the sale, some or all of the commission may then need to be recovered from  the salesperson responsible This is referred to as a chargeback or a clawback.
  • Churn: Customers lost to cancelation or abandoning a product or service is known as customer churn. 
  • Decelerators: When a salesperson fails to reach a certain percentage of their quota or goal for the month, quarter or year, their employer may choose to penalize their low performance by lowering their commission rate or paying out a smaller cut of their commission. For instance, if a salesperson fails to hit 75% of their quota, perhaps coming in at just 70%, they may only receive 60% of the commission they would have earned if full quota had been achieved 
  • Draws: Salespeople working on straight commission may earn advances, known as draws, on commission they’re expected to earn on future sales. This ensures that salespeople earn consistent income. Similar to advances, draws must be paid back if sales fall below quota. See also Advance.
  • Exceptions: Sales organizations occasionally apply exceptions to certain products and services sold by their sales team, meaning that commissions may not be awarded the same way for those sales.
  • Floor: The bottom-level quota (a set number or percentage) that a salesperson can earn is called the Floor. In most cases, the salesperson cannot earn commission until they’ve reached the Floor. Failure to meet the floor could also trigger a sales Decelerator.
  • Goals: In addition to setting quotas for salespeople and sales teams, an organization also sets larger business goals. Examples of these goals include expanding territories or growing the customer base. See also Targets.
  • General or Gross Ledger Codes: Finance teams use these codes, known as GL Codes, to categorize and organize revenue data and assign revenue to specific sources.
  • Guarantees: Salespeople are occasionally offered guaranteed compensation, whether it be salary or a portion of commission, no matter how the employee performs.
Woman sits with a group of salespeople and raises her hand because she knows about sales commission management.

Whether you’re creating sales commission rules from scratch, searching for a sales commission manager, or looking for sales commission management software, you need the right terms to get it done.

  • Hierarchy (occasionally Multiple Hierarchies): Seniority and organizational structure can impact how commission is paid. Ranking within the company as well as skill level results in increased rates while managers may also earn a commission as reward for team performance. Multiple Hierarchies may exist within a single organization and could result in payment through several levels of the reporting chain
  • Manual Adjustments: Occasional shifts in sales priorities result in last-minute changes to how commissions are distributed. This would require Manual Adjustments by the commission manager or administrator to ensure the changes are applied properly. Adjustments may also be needed for slight bumps in attainment so that someone hits their quota or to override the commission as a whole. There may be several reasons Manual Adjustments are needed.
  • Margin: Employers often choose to determine sales commission based on the gross margin of a product, which is the amount of the sale minus overhead costs. Therefore commission may be higher for a salesperson who sells a higher margin product than a salesperson who sells more of a lower margin item.
  • On-Target Earnings: When determining sales compensation plans for salespeople, a company needs to calculate On-Target Earnings, meaning the amount that an average salesperson should be earning (including base salary and sales commission) if they are selling at an average cadence. On-Target Earnings should provide a competitive income in order to attract the best talent. A common ratio of payment is total earnings should be about 50% salary and 50% commissions for a salesperson achieving 100% of quota.
  • Overrides: If an employee earns commission based on the sales of another employee, that’s an override. Managers often earn overrides on the sales of their employees as a reward for team performance.
  • Paid-on-Billed or Paid-on-Paid: Sales commissions may be paid at different points during the sales funnel. Paid-on-Billed commissions will be distributed when a customer receives a bill; Paid-on-Paid commissions get processed when a customer pays the bill.
  • Pods (or Teams): Groups or divisions including a number of commission-based employees who may be eligible for shares of a Pool commission.
  • Pools: In the case of pooled sales commission, an organization sets aside a predetermined “pool” or amount of money that can be earned by a specific group of employees within the company as sales commission. If the group as a whole reaches a predetermined quota, the pool is distributed among them. The group may be eligible for equal shares which means that, if they qualify, each member of that group earns the same share of the pool; in the case of proportional shares, the members of the group earn an amount that’s relative to their performance.
  • QTD or Quarter to Date: A time frame that determines sales from the beginning of the quarter to date. Quarters may vary based on the business’s fiscal year but typically each quarter lasts three months beginning on January 1 of the year in question for most companies.
  • Quota: In order to set expectations for sales, organizations determine quotas that salespeople must meet to earn their commission. Generally, if they reach 100% of their quota, they earn their entire commission but failing to achieve quota can reduce the rate at which commissions are paid. Additional variables, like sales Decelerators or Accelerators, may impact the portion earned.
  • Quota Relief or Quota Credit: The amount of the sale (dollars or units) that will be credited to the salesperson’s target is called Quota Relief. A company wishing to have sales focus on higher-margin products may offer higher Quota Relief for that product or reduce Quota Credit for lower-margin products.
  • Residuals (or Usage or Trailing): In another type of sales commission payment schedule, commissions are distributed each time a customer submits a payment. These types of commission can be known as Residuals, Usage, or Trailing commissions, depending on the industry.
  • Rolling 12 Month Metrics: In order to determine goals, targets, and quotas, an organization might reference trends from the previous 12 months. Each month, the metrics update with the most recent 12 months, meaning that it’s constantly a Rolling 12 Month Metric. Rolling period targets are often used as a way to continually refresh the sales targets and goals.
  • Rule of 78: Sales organizations that deal with monthly or recurring fees use a calculation to determine a full year’s revenue. The calculation, known as the Rule of 78, requires the finance department to multiply projected revenue for each month by 78. This is often a way to emphasize the value to the company of meeting a monthly sales quota.
  • Sales Contests: Temporary sales incentive programs are often put in place by sales management as a way to inspire sales of a particular product or service. This may be triggered by an attempt to sell of remaining inventory or grow a customer base for a newly launched service. Temporary incentives are often known as sales contests since they’re meant to spark competition between sales reps. The reps who sell the most will earn an incentive.
  • Spiff: An employer or sometimes a manufacturer offers an additional incentive to salespeople for the sale of a specific product or short term goal. This is known as a spiff and usually, it’s only extended for a limited amount of time.
  • Split: A single sale might trigger a commission that goes to multiple people. Commission for that sale may be split between the salesperson responsible as well as a manager, a non-sales support employee, a partner, or other individuals who may get a cut of that commission.
  • Staged Payments: When commissions are scheduled to be paid in installments over a period of time, they’re called staged payments. See also Amortization.
  • Target: Sales managers or executives set targets for their sales teams to hit. This generally means that a team needs to close a specific number of sales during a time period, such as a month or a quarter. The target is defined by how much money the sales team or the company as a whole needs to generate in order to maintain budgets.
  • Territory: Salespeople are often assigned to a defined geographic area, called a Territory. The salesperson or perhaps a team of salespeople focus their attention on selling to customers located in that region. Their territory sometimes influences the amount of commission or the rate of commission a salesperson earns.
  • Tiered Rates: Commission payment rates may vary depending on the percentage of quota a salesperson has met or some other performance measure. Tiered rates allow for salespeople to earn commission at a higher rate if they’ve achieved a certain milestone past their original sales quota. For instance, a rate may increase by a percentage point if the salesperson has met 110% of their quota.
  • Variable: A number of factors can be considered when determining sales commission rates. These are called variables and include things like Territory or Hierarchy.
  • YTD or Year to Date: Similar to QTD, YTD is a timeframe used to determine sales goals, targets, and quotas. In this case, the time frame includes an entire fiscal year, which typically begins on January 1 of that year.

Feel more comfortable talking about sales commissions now? Either way, we can walk you through how to automate all of it. Set up a free demo with us today. And you can put your flashcards down.

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