Accounting Best Practices, Fifth Edition

8–5. Simplify the Commission Structure

The bane of the accounting department is an overly complex commission structure. When there are a multitude of commission rates, shared rates, special bonuses, and retroactive booster clauses, the commission calculation chore is mind-numbing and highly subject to error, which causes further analysis to fix. An example of such a system, based on an actual corporation, is for a companywide standard commission rate, but with special increased commission rates for certain counties considered especially difficult regions in which to sell, except for sales to certain customers, which are the responsibility of the in-house sales staff, who receive a different commission rate. In addition, the commission rate is retroactively increased if later quarterly sales targets are met, and are retroactively increased a second time if the full-year sales goal is reached, with an extra bonus payment if the full-year goal is exceeded by a set percentage. Needless to say, this company went through an endless cycle of commission payment adjustments, some of which were disputed for months afterwards. Also, this company had great difficulty retaining a commissions clerk in the accounting department.

The obvious resolution is a simplification of the overall commission structure. For example, the previous example can be reduced to a single across-the-board commission ...