Page 167 - Accounting Best Practices

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Commissions Best Practices
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audit, in case the controller or the internal audit manager wants to verify that
commissions are being calculated correctly. The manual nature of the work
makes it both tedious and highly prone to error.
The answer is to automate as much of it as possible by having the computer
system do the calculating. This way, the commission clerk only has to scan
through the list of invoices assigned to each salesperson and verify that each has
the correct salesperson’s name listed on it and the correct commission rate
charged to it. To make this system work, there must be a provision in the account-
ing software to record salesperson names and commission rates against invoices,
a very common feature on even the most inexpensive systems—though if it does
not exist, an expensive piece of programming work must be completed before
this best practice can be implemented. Then the accounting staff must alter its
invoicing procedure so that it enters a salesperson’s name, initials, or identifying
number in the invoicing record for every new invoice. It is very helpful if the
data-entry screen is altered to require this field to be entered, in order to avoid
any missing commissions. Once this procedure is altered, it is an easy matter to
run a commissions report at the end of the reporting period and then pay commis-
sion checks from it. This is a simple and effective way to eliminate the manual
labor and errors associated with the calculation of commissions.
The main problem with using automated commission calculations is that it
does not work if the commission system is a complex one. For example, the typi-
cal computer system only allows for a single commission rate and salesperson to
be assigned to each invoice. However, many companies have highly varied and
detailed commission systems, where the commission rates vary based on a vari-
ety of factors and many invoices have split commissions assigned to several sales
staff. In these cases, only custom programming or a return to manual commission
calculations will be possible, unless someone can convince the sales manager to
adopt a simplified commission structure. This is rarely possible since the sales
manager is the one who probably created the complicated system and has no
intention of seeing it dismantled.
Cost: Installation time:

8–2 CALCULATE FINAL COMMISSIONS FROM ACTUAL DATA

A common arrangement for departing salespeople is that they are paid immediately
for the commissions they have not yet received, but which they should receive in
the next commission payment. Unfortunately, the amount of this commission pay-
ment is frequently a guess, since some sales have not yet been completed and
orders have not even been received for other potential sales on which a salesperson
may have been working for many months. Accordingly, there is usually a compli-
cated formula in the typical salesperson’s hiring agreement that pays out a full
commission on completed sales, a partial one on orders just received, and perhaps