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Commission Schemes

A commission scheme says who gets paid, for what, how much, and where the cost is recognised.

Where to find it

Architect Panel → ERP - Trading & Analytics:

  • Commission Schemes — payee, basis, criteria, rate, tiers and accrual account

Architect Panel → ERP - Finance:

  • Chart of Accounts — the accrual account the cost posts to

What a scheme holds

  • Payee — the person or team earning it.
  • Basis — what the calculation runs on: revenue, margin, or another measure.
  • Criteria — which transactions qualify.
  • Rate — a flat percentage.
  • Tiers — bands, where the rate changes with volume.
  • Accrual account — where the cost is recognised.

Basis: revenue or margin

This is the single most consequential choice. Commission on revenue rewards volume, and a salesperson maximising it will discount to win business — rationally, because the discount costs them nothing.

Commission on margin aligns the incentive with the outcome the business actually wants. It requires cost data to be right, which is a good reason to get cost rates and stock costing correct first.

Tiers

Tiers are held as explicit bands rather than a formula, so an accelerator — 3% to target, 5% above it — is stated rather than encoded. That means somebody can read the scheme and see what it does, which matters because commission disputes are usually about interpretation rather than arithmetic.

Be explicit about whether a higher tier applies to all sales or only the excess above the threshold. Both are used; only one is what you agreed; and the difference is large.

The accrual account

Commission is a cost of the period the sale was made in, not the period it is paid in. Naming the accrual account puts the charge in the right month.

Without it, commission appears when it is paid, so a strong December followed by a January payout makes December look better than it was and January worse. Match the accrual account to whatever your accountants use.

Keep schemes simple

A scheme nobody can calculate in their head does not motivate — it produces monthly queries instead. If explaining it takes more than a couple of sentences, it will be argued about.

Change schemes at period boundaries

Mid-period changes raise the question of which deals fall under which scheme, and that question has no good answer. Set the new scheme running from a period start.

Clawbacks

Decide up front what happens when an invoice is credited or a customer does not pay. It is far easier to agree while nobody is affected than after somebody has been paid on a sale that unwound.

Worked example

A distributor pays on margin: 3% up to £40,000 of margin per quarter, 5% on the excess only, stated explicitly in the tiers. Criteria exclude intercompany sales. The accrual posts to Sales Commissions, so each month's accounts carry the commission earned in that month rather than paid in it.

Recommendations

  • Commission on margin wherever your cost data supports it.
  • State whether tiers are marginal or total.
  • Always set the accrual account.
  • Change schemes at period boundaries, and agree clawbacks in advance.