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Requirement

Plan for salespeople commissions in a dedicated financial model

Functional Area

Planning

Industries
All
Tags
Budgeting
Forecasting
Commissions
DETAILS

Description

In Corporate Performance Management (CPM), dedicated financial modeling for salespeople's commissions refers to a systematic approach to developing and managing financial representations of the company's sales compensation plan. This approach helps in accurate budgeting and forecasting and can include various commission structures like tiered, straight-line, or variable commission plans. The ability to model sales commissions accurately is a significant part of CPM software functionality.

Example Use Case

Scenario: A large multinational corporation follows a tiered commission structure for its salespeople. However, currently, they are manually calculating and allocating these commissions. This time-consuming process invites errors and lacks historical data tracking and forecasting abilities.

Solution: The corporation implements a CPM software solution with a dedicated financial model for salespeople's commissions. The model auto-calculates commissions based on the tiered structure and ensures accurate allocation. Moreover, the model also allows for future commission forecasting and stores historical data for comparative analysis.

Considerations

There are a million different compensation plans out there for salespeople. To make it more difficult, they often change annually. This is why sales compensation planning tools are usually developed from the ground up inside a modeling tool instead of operating as a fixed module. Consider the following potential compensation plans when going through demonstrations of solutions. Also consider that you may have a mix of these, or you may change certain components each year. If these changes require a total reboot of the model, you're better off doing it in Excel.

Type of Plan Description
Straight Commission Compensation is entirely based on sales performance, with salespeople earning a percentage of the sales they generate. This plan is highly motivating for high performers but can be unpredictable.
Salary Plus Commission A hybrid approach where salespeople receive a base salary plus a commission on sales. This plan offers a balance between financial security and performance-based incentives.
Tiered Commission Commission rates increase as salespeople hit higher sales targets. This plan encourages salespeople to exceed their sales goals by offering higher rewards for higher levels of performance.
Team-Based Compensation Compensation is based on the performance of the entire sales team or department. This plan fosters teamwork and collaboration but may dilute individual performance incentives.
Territory Volume Compensation Salespeople are compensated based on the total sales volume within a specific geographic territory. This plan is common in industries where territory management is crucial.
Profit-Based Commission Commission is based on the profitability of sales rather than just the sales volume. This plan aligns sales incentives with the company's profitability goals. It also requires that profitability be calculated accurately and on time in order to meet payroll obligations.
Draw Against Commission Salespeople receive an advance (draw) against future commissions. This provides income stability, with the draw being reconciled against actual commissions earned over time. In planning, this requires that the draw expense take place when the salesperson is hired.
Residual Commission Salespeople continue to receive commissions on recurring revenue from clients they have secured, such as subscriptions or service contracts. This plan rewards the long-term value of customer relationships.
Bonus Plans Salespeople receive bonuses for achieving specific goals, such as signing a key account or reaching sales milestones. Bonuses can be added to any of the above plans for extra motivation.

Questions to Ask a Vendor

  • Commission Structures: Does your software offer the flexibility to handle different types of commission structures? Are any commission structures built in?
  • Comp Plan Recommendations: Can the software provide actionable insights by crystallizing commission data with sales performance? For example, can it guide us to a better way of structuring our compensation plans that is more beneficial for the company?
  • Changing the Compensation Plan: Can we shift our structures year to year, or are we stuck with the same comp plan forever? How much work goes into making changes?
  • Unique Plans: Are we able to create multiple plans and apply them to different sales functions, like Account Executives vs Account Managers vs Sales Engineers? What about applying different quota calculations to individuals, like paying a more seasoned rep a larger percentage?