Page 168 - Accounting Best Practices

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8–3 Construct a Standard Commission Terms Table
even a small allowance on expected sales for which final orders have not yet been
received. The work required to complete this formula is highly labor-intensive
and frequently inaccurate, especially if an allowance is paid for sales which may
not yet have occurred (and which may never occur).
A better approach is to restructure the initial sales agreement to state that
commissions will be paid at the regular times after employee termination until all
sales have been recorded. The duration of these payments may be several months,
which means that the salesperson must wait some time to receive full compensa-
tion, but the accounting staff benefits from not having to waste time on a separate,
and highly laborious, termination calculation. Instead, they take no notice of
whether a salesperson is still working for the company and just calculate and pay
out commissions in accordance with regular procedures.
There are three problems with this approach. One is that if the commission
calculation is made automatically in the computer system, sales will probably be
assigned to a new salesperson as soon as the old one has left, requiring some man-
ual tracking of exactly who is entitled to payment on which sale during the transi-
tion period. The second problem is that if a salesperson is fired, most state laws
require immediate compensation within a day or so of termination. Though the
initial sales agreement can be modified to cover this contingency, one should first
check to see if the applicable state law will override the sales agreement. Finally,
this type of payout usually requires a change to the initial employee contract with
each salesperson; the existing sales staff may have a problem with this new
arrangement since they will not receive payment so quickly if they leave the com-
pany. A company can take the chance of irritating the existing sales staff by unilat-
erally changing the agreements, but may want to try the more politically correct
approach of grandfathering the existing staff and only apply the new agreement to
new sales employees. In short, delaying the final commission payment runs the
risk of mixing up payments between old and new salespeople, may be contrary to
state laws, and may only be applicable to new employees. Despite these issues, it
is still a good idea to implement this best practice, even though it may be several
years before it applies to all of the sales staff.

Cost: Installation time:

8–3 CONSTRUCT A STANDARD COMMISSION
TERMS TABLE
As salespeople may make the majority of their incomes from commissions, they
have a great deal of interest in the exact rates paid on various kinds of sales. This can
lead to many visits to the commissions clerk to complain about perceived problems
with the rates paid on various invoices. Not only can this be a stressful visit on the
part of the commissions clerk, who will be on the receiving end of some very force-
ful arguments, but it is also a waste of time, since that person has other work to do
besides listening to the arguments of the sales staff.