Payroll and compensation design for a sales team

Sales compensation is where the finance function and the sales function meet, and in many BC companies they meet badly. Plans are written to attract a hire, copied from a competitor or adjusted mid-year to fix a problem, and the result is a plan that pays for the wrong behaviour and is impossible to reconcile at payroll time.

Here is how we design sales compensation with owners so the plan rewards the results the company needs, costs what the model says it costs and can be run through payroll without a dispute every month.

Decide what you are paying for

Start with the outcome the company needs from sales this year. New customers, higher margin, a particular product line, retention or a larger average deal. Then look at what the current plan rewards. Commission on revenue rewards volume and discounting. Commission on gross margin rewards price discipline. Commission on collected amounts rewards selling to customers who pay. Bonuses on retention reward account management. Most plans need a mix, but every element should trace to an outcome you have chosen.

Model the plan against the margin

Before any numbers are shared with the team, build a simple model. For a range of sales outcomes, from weak to exceptional, calculate the revenue, the gross margin and the total compensation the plan would pay, including base, commission, bonus and employer payroll costs. Check that the company keeps an acceptable share of the margin at every level, and especially at the top, where accelerators can pay out more than the deal was worth.

Run the model for each role, because an inside sales role, a field role and an account manager carry a different balance of base and variable pay. Share the model with your CPA so the accruals and payroll treatment are agreed in advance.

Choose the mix of base and variable

A higher base with a smaller variable suits long sales cycles, technical sales and roles where the company's brand does most of the work. A lower base with a larger variable suits short cycles and roles where individual effort drives the result. The mix should also reflect how much control the person actually has over the outcome. Paying heavily on variable for a role that depends on leads marketing generates produces turnover, not performance.

Employment standards in BC set minimums and rules that affect commission plans, including what happens on termination and how earnings are calculated. Your lawyer reviews the plan document before anyone signs it.

Write a plan that can be calculated

The plan document should state the measure, the rate, the period, when the commission is earned, when it is paid, what happens to a sale that is cancelled or never collected, how split deals are handled and how the plan can be changed. If two reasonable people could read it and reach different numbers, it is not finished. Every term in the plan should correspond to a number the accounting or CRM system produces without manual work.

Include worked examples in the document: a typical month, a month with a cancelled deal, a month where a customer pays late and a month at the top of the range. Examples resolve most disputes before they start, because the salesperson can see how their own month will be treated. Review the examples with the salesperson when they sign, and keep a signed copy of the plan on file with the employment agreement.

Run it through payroll cleanly

Set a monthly or quarterly commission calculation with a fixed cut-off, a standard report from the sales system, a review by the finance lead and sign-off by the sales manager before payroll. Accrue commissions earned but not yet paid so the monthly statements show the true cost of sales in the month the sale happened. Reconcile the commission expense to the plan every quarter. Payroll tax treatment of commissions and bonuses is confirmed with your CPA or payroll provider.

Mistakes in sales compensation we see most

• Paying commission on booked revenue and discovering the customer never paid
• Accelerators that pay more than the incremental margin of the sale
• Changing the plan mid-year without modelling or notice
• Plans so complex that the salesperson cannot predict their own pay
• No accrual, so a large commission month surprises the statements and the cash forecast
• Treating the plan as a sales document rather than a finance and legal document