Sales Commission Terms
Important Sales Commissions Terms that is common knowledge in the industry
An incremental incentive/commission whereby a salesperson is rewarded with a higher payout relative to what could have been earned. Accelerators are used to motivate salespeople to perform better than normal expectations and are introduced once a salesperson has attained their quotas. Also known as a kicker, or a ramped rate.
Example: Rachel could have a 5% commission rate for the first $100,000 dollars of revenue her company produces. If the revenue goes anything over that amount it would result in a 8% commission rate motivating her to continue her amazing performance.
Accumulation of real payouts and projection of payouts based on the most recent performance or based on other pre-defined projection methodology
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A metric that measures performance against a pre-defined sales target or a quota. The other commonly used term for this is “attainment”. This is one of the most commonly used performance measures and is calculated by dividing actual sales outcome or volume by the expected target sales. This value is expressed in terms of percentage.
ASC 606 Standard
An accounting standard that ensures international alignment on how companies recognize revenue from contracts with customers. Hence it is also known as the revenue recognition standard. It establishes that whenever a company satisfies its performance obligation by fulfilling the promised good or service to a customer, revenue should be recognized.
A bonus is a payment that is generally discretionary in nature and can sometimes be paid in cash or through other means such as stock options. Bonus by definition is backward-looking. This is different from incentive plans because that requires clear communication in terms of individual and corporate performance expectations and sales incentives associated with different levels. Some sales compensation professionals also use “bonus” & “commission” interchangeably.
A clawback typically refers to a contractual provision that requires a sales rep to return or reverse an incentive or payout that has already been paid in the form of advance or for till date performance. Clawbacks occur in the event of a customer stopping to avail or returning the product/service, fraud or misconduct, advance paid for future performance expectations, or simply because there were errors in the original calculation.
A process that emphasizes the development of individuals and/or teams to gradually improve the overall performance. It refers to providing ongoing feedback, training, motivation in order to help the team & its individual members enhance the performance & achieve goals. Sometimes these expectations are built into the incentive compensation plans with the help of management by objectives.
Commission per Sale
This is the simplest type of sales compensation plan in which a flat commission dollar value is paid per unit sale. However, the unit of measurement for which the commission is paid may depend on the company’s strategic goals and objectives. More often than not the flat commission may be paid per dollar of revenue sold by the salesperson or per unit of product sold.
Example: Insurance agents who receive approx 7% of annualized net premium upon selling an insurance policy to clients.
Commission Management Software
A system/software that enables you to automate the sales compensation calculation process based on desired company rules and requirements. It also allows you to track & monitor the individual rep’s performance and corresponding sales commissions. The other commonly used terms for this are incentive compensation management software, sales compensation software, sales commission software.
The commission is a form of additional compensation paid to the rep based on their sales performance above and beyond their basic salary. The commission is a type of variable compensation paid to the salesperson depending on the individual goals and their associated performance. They are typically a percentage of sales revenue generated, volume of sales, gross margin and/or other variables.
Commission expense is an accounting term that shows the sales commission amount to be paid to a salesperson during a considered period of time for the related revenue generated. This kind of expense is accounted for and recorded as a commission liability in the same period.
Compensation Management Software
Compensation Management Software is a tool used to manage compensation strategies (fixed + variable), automate pay calculation and tracking, plan bonuses and incentives, and enable pay adjustments.
A compensation strategy is a high-level plan that helps organizations determine rewards, benefits, pay, and other forms of remuneration that align with the cultural, organizational, and business growth objectives.
CRM stands for Customer Relationship Management. It is a process/technique that enables organizations to keep track of current & potential customer interactions, navigate relationships with various stakeholders during the sales process resulting in improved business relationships, better customer service & ultimately increased profitability. Salesforce, Hubspot, and Zoho are some of the leading CRM vendors today.
Selling a related or complemetary product or a service to an existing customer is known as cross-selling
A decelerator is essentially an opposite of an accelerator. Decelerator is generally applied in 2 situations for salespeople – a lower commission rate below a certain threshold or at very high-performance levels to avoid windfall. It essentially reduces a rep’s payout relative to what could have been earned with the base commission rate.
Direct credit is a monetary deposit into the account of the payee, plan participant, or sales rep depending on the various activities performed by him ranging from scheduling and conducting meetings, sales outcome, etc.
A draw is an advance which the sales rep can borrow from the organization against future anticipated sales incentive payments. They are of two types – Recoverable (the rep will be required to pay the company back) & Non-recoverable (no need to pay it back). It primarily offsets the lack of incentive payments during a sales rep’s ramp-up and on-boarding or at times for high-value products with complex and long selling cycles.
The amount that the salesperson is eligible to get paid for based on their sales performance before applying any additional payment qualifiers, multipliers, time in territory constraints.
A type of compensation structured specifically for the senior leadership of an organization. This can include both financial and non-financial benefits received by the executive. Long term incentives, performance-based bonuses, stock options, or even retention plans can all be considered as part of Executive Compensation.
A minimum guaranteed amount to be paid to a sales rep by an organization for any period that may or may not be deducted from future commission payouts depending on IC plan design. This is generally done to account for new-hire situations, adjustments during pandemics or natural calamities, or at times to account for complex product sales.
Incentive Compensation Management
Incentive Compensation Management abbreviated as ICM often refers to a process that includes several elements such as software/tool that assists the sales compensation administrators in automating the process of administering, calculating, reporting and analyzing incentive compensation programs while eliminating errors associated with using spreadsheets, and overall governance of the IC program that includes workflows and proactive communication.
Incentive management is a process of identifying & offering appropriate rewards & benefits to the salespeople for achieving specific goals. It is mostly used for motivating employees to improve their performance while keeping them aligned with strategic business objectives.
A sales incentive plan where a payee is compensated based on deals where they have contributed or helped n some way but not necessarily have converted themselves.
Incentives given to individual reps on achieving desired performance standards. Individual incentives also refer to compensation given to an individual for an additional contribution to meet the organization’s goals. They are measured objectively using quantifiable metrics for a specific period of time.
Key Performance Indicators
Key Performance Indicators also termed as KPIs are quantifiable metrics used by organizations to gauge and analyze factors deemed crucial for their success. They are the mirror to track the progress of a company’s strategic plan with clear benchmarks that defines the good, the bad, and the ugly.
The kicker at times is used interchangeably for accelerators but there is a slight difference. An incremental sales incentive or commission whereby a sales rep is rewarded with a higher fixed payout amount to meet a certain strategic benchmark or corporate goal. The kicker component is used at times to align salespeople to strategic goals beyond regular incentive plans. The objective is to motivate salespeople to go above and beyond the regular performance other than meeting their sales quotas.
Line of Business (LOB)
Line of Business refers to the business segments that can be separated based on the type of products, services, customers, etc.
Long Term Incentive
Long term incentive is the type of component which is designed to reward employees for a specific future goal. At times this is also used as a retention tool to provide additional cash or stock options to employees for staying with the organization for a minimum period of time.
Management by Objectives (MBO)
Management by Objectives (MBO) is a business strategy that allows organizations to define individual level goals based on desired activities and behaviors and ensure alignment with broader corporate objectives. It is a strategic management model that aims to improve the performance of the organization by setting up a common ground for both management and employees.
Modifiers are known as multipliers in some industries. This is a design feature that allows the sales incentive plan designer to accelerate or decelerate a payee’s incentive payout based on one or more performance measures. This concept is primarily used to share corporate successes and failures with the broader salesforce.
On-demand is a software as a service model that requires little to no installation and is readily available over the internet with the help of web interfaces. The software is deployed and managed on a platform provider’s cloud computing infrastructure.
On-premise means that all the IT infrastructure is onsite on business physical location and any external software or technology needs to be installed, deployed, and managed on the internal onsite IT infrastructure.
On-Target Commissions (OTC)
This is a base target pay that refers to the total sales compensation paid to the rep, plan participant, or payee for meeting their performance targets. This is also known as OTE (On-Target Earnings).
On-Target Earning (OTE)
On-Target Earnings (or Target Earnings, Annual Target Pay) is the amount paid to a payee or a rep if they meet their sales performance goals or target. The total compensation typically refers to an employee’s pay structure made of basic salary and a variable component such as commission as their compensation.
A commission earned by a sales rep owing to a sale made by another sales rep is called an override. These are essentially indirect payments made to acknowledge the role of a sales rep in making a sale outside his target customer list.
Pay for Performance
Pay for performance at times is used interchangeably for variable compensation, incentive compensation, sales compensation, sales commissions, at-risk pay. Payout component which is not guaranteed and varies depending on the sales performance. Almost 90% of companies have a “pay-at-risk” compensation plan for salespeople and it is paid on top of the base salary.
Pay for performance terminology is also used frequently during incentive compensation plan health check to analyze the impact of sales growth on actual sales incentives payout.
The ratio of a rep’s base salary to the target commission expressed in terms of percentage is called pay mix. This pay mix varies from industry to industry depending on several factors such as the possible contribution of the salesperson on the final sale, complexity of sale, length of selling cycle, etc.
Example: Stuart has a 60/40 pay mix meaning 60% of his earning is fixed base salary and 40% is variable based on the target achievement.
Adjustments made to final sales incentives due to wrong calculations, incomplete data, or external constraints.
Payout curves define the impact on potential sales incentive payout based on various performance levels and can be used to drive the desired sales behaviors. A well-designed payout curve helps in hiring and retaining top sales talent and motivates existing salespeople to achieve more sales and excel in the field. An incentive payout curve defines the relationship between target achievement % and the associated payout for different levels of performance. Payout curve design needs to be such that it allows desired differentiation based on the performance. It is imperative to model various inflection points on the curve to meet the overall brand objectives. The payout curve is also called “Lookup Curve” in some industries.
A sales incentive plan is a way to motivate and reward salespeople for achieving a particular goal or target defined based on broader strategic business objectives. IC plan is made up of several components, such as payout curves, grids, or commission rates, territories, sales quotas and targets, gates or payment qualifiers, accelerators, performance periods, etc. to calculate how much they need to be compensated.
Sales compensation plan design is a process that is a combination of science and art. The plans are designed to motivate and engage the salespeople to meet specific business objectives. There are key guiding principles that need to be considered to drive the definition and structure of an incentive plan. These key principles are:
Align business objectives
Pay for performance
Provides equal earning opportunity
Competitive in the labor market
Easy to understand and administer
The adjustments made by the organization to a sales rep’s performance or incentives based on time spent in the territory (eligibility) or at a position.
Qualifiers are constraints or conditions in the IC plan design that determines the IC eligibility of the payee for a payout on any particular plan component. The idea is to add the set of threshold conditions to the plan design that guides the performance payout of one component based on the performance of the other plan component. Payment qualifier is also called “Gate” at times.
Quota setting is a process to set realistic and achievable sales targets for salespeople using numbers, experience, and knowledge of the changing market. This is also commonly known as goal setting or target setting.
A volume discount or incentives offered by manufacturer or supplier to encourage purchases for a single product or across a group of products.
Periodic payments made by the company for a specific product or ongoing service are referred to as recurring revenue. It is common in SaaS business subscription models or long-term services engagements. The period of recurring revenue may vary depending on the business model and contracts such as annual, semesterly, quarterly, monthly, etc. Many times companies prefer long period recurring revenue and are willing to give discounts as that helps them get the revenue upfront and allows them to engage the customer for the long-term.
This typically refers to the rolling of sales credit from one payee to another. This is done to account for organizational hierarchy where several plan participants’ performance is rolled up to their sales manager at each level till the top sales director or at times even corporate leadership for the calculation of performance-based incentives and commissions. There are also times these sales rollups are performed across teams for support roles for better collaboration and coordination.
The adjustments, overrides made to sales due to wrong or incomplete information in source data systems
Sales commission is a variable pay given to the salespeople for defined sales outcomes and performance levels. It is also known as sales incentives.
Sales Commission Metrics
Also known as a performance measure, pay determiner. This is a key performance indicator that is defined based on broader corporate objectives for a product and is tracked to calculate sales incentives for that particular brand. Common measures are volume or revenue, profitability, net revenue dollars, share and share change, etc..
Sales Commission Plan
The sales commission plan is the guidebook to calculate variable performance pay for salespeople. It comprises of several important components such as product portfolio details, performance measures and calculation details for individual products, payment qualifiers and multiplier details, eligibility criteria and information about annual awards.
Sales compensation is used interchangeably with incentive compensation, sales incentives management, sales commissions management. Sales compensation is the total amount paid to the salespeople in exchange for actual sales outcomes. It comprises of base salary, incentives and other monetary benefits.
Sales Force Automation (SFA)
Automation of repetitive administrative tasks done by salespeople and sales operations group using software and tools to improve productivity and deal closure rates.
Sales Force Effectiveness (SFE)
The primary objective of focus on Sales Force Effectiveness (SFE) is to improve the capabilities and skills of the workforce aimed at enhancing their performance resulting in improved sales outcome and organizational growth. The purpose of SFE metrics is to measure and support the analysis of the performance of individual salespeople and broader salesforce. There are several ways the performance and efficiency of the sales teams can be improved. These include organizational restructuring, customer segmentation & targeting, behavioral competency models, sales playbooks, and performance management.
Sales Performance Management (SPM)
Sales Performance Management (SPM) is a way to automate the operational sales processes, analyze outcomes, and communicate results to improve the performance of your sales teams and individual salespeople. SPM primarily refers to the effectiveness of sales commissions management, sales quotas management, and territory management, advanced performance analytics & insightful reporting.
Quotas generally are a good way to engage salespeople by providing them visibility to the sales target that needs to be hit. These targets are primarily defined for a specific period of time after considering several historical performance parameters and future selling potential. Quotas are also known as targets, operating plans, etc. in certain geographies and industries.
Sales Targets are goals specified for sales reps and sales teams to achieve in a pre-defined time frame. Measurable targets act as a good engaging tool and allow salespeople to proactively plan for success. Targets are interchangeably used as Quotas, Operating Plan, etc.
Service Level Agreement (SLA)
Service Level Agreement is a contract between a service provider (vendor) and its customers that highlight the standard of the service that the vendor is obligated to provide to its customer. For example, if an SLA mentions an uptime of 99% for their SPM and 100% error-free deliverables, then they are obligated to provide an SPM with high availability, as high as 99% and 100% error-free deliverables.
Shadow Accounting Time
The effort spent by salespeople to manually calculate their commissions based on their sales performance to validate their final incentive payout
Sales Performance Incentive Fund (SPIF) is designed and deployed to help accomplish specific business objectives. SPIF allows for extra incentive to be paid to drive specific behaviors, usually for a limited short time. SPIFFs are generally defined to complement the base incentive plan. The contest metrics should always be designed with a base IC plan in mind and the design team needs to ensure that the metrics are not in conflict with broader strategic goals. Typically, when a particular product or a service needs focus or a new product is launching, sales leadership turns towards SPIF. It is also known as SPIFF in the sales compensation space.
Target Incentive Compensation (TIC)
It is the total variable compensation paid to a sales rep if he/she achieves their target product performance. Target Incentive Compensation does not include base salary. TIC is also known as on-target commissions and target commission payout. Base salary and target incentive compensation together are known as on-target earnings or on-target compensation.
A specific time period or duration defined in the contract for the validity of provided software and services. The premature violation of the agreement on service grounds or ethical grounds may impose penalties.
A defined scope of the geographical area within which a salesperson should focus on selling desired products and services. Sales territory can be defined on the basis of geography, customer type or sales channels.
The threshold is the performance point below which a salesperson is not paid any incentives. It should be set for each product separately to account for the specific behavior and market conditions for the product. The placement of the product in the product life cycle also plays a significant role in deciding the threshold. Thresholds are generally set at a performance so that around 90% of salesforce achieves that level of performance.
Top performers are the highest achieving salespeople who drive a significant amount of total organization revenue. They can help the organization in defining ways to improve sales processes by throwing light on customers’ behaviors and desired activities based on customer segments.
Total Rewards can be defined as anything that a business offers to its employees including but not limited to employee’s pay, sales incentives, long-term incentives, recognition and reward programs, benefits, training, etc. It is also known as Total Compensation.
Upselling is to focus on upgrading or enhancing the product that customer is already buying or adding a service to increase the value of a sale
The portion of the total compensation of a sales rep that is dependent on the short-term sales performance and is determined by revenue generated by the salesperson or achievement of defined sales quotas.
Automated business processes that follow a particular set of orders and approvals. ICM workflows are defined around several processes that include data collection, data cleansing, sales alignment and crediting, payment adjustments, plan acknowledgement, dispute management, etc.