What is Commission Calculation and How to do it.

Commission Calculation

For the sales team, one of the most processes apart from selling is commission calculation. Companies often need to calculate the commission of their employees after a certain time period or after they’ve reached a certain target. Commission not only gives a portion of the sale to the employee but also keeps them motivated to go out there and sell more. Lucrative commission and high commission rates are something that candidates consider thoroughly before joining any company. But if you’re still new in the business or have just started giving commission, here is a handy guide with which you can calculate the commission easily.

How to do Commission Calculation

Follow these steps to calculate the commission of your employees or team.

Determine the commission period.

This is the first and one of the most important steps of the process. You need to decide when the commissions will be paid to the employees. Would it be on a weekly, monthly, quarterly, or annual basis? This is necessary as the total commission would be paid after this period only.

Identify the commission base.

The purchase price of total products sold by an employee or a team or your entire organization makes up the commission base. So you need to identify the total amount of sales completed in a given commission period. If you are calculating commission for an employee, the base will be the total sales that the employee has done in the given period.

Determine the commission rate.

Commission rate is an important factor in deciding how much commission the employee will get. Commission rate can be variable and can change according to the product he sold, the period in which he sold or any other criteria.

Calculate the commission.

By multiplying the commission rate with the commission base, you can calculate the commission that a particular employee has earned. Do note that the total commission will be different for different commission rates and products.

Apply the tier calculation if needed.

In some companies, the commission rate changes as per the number of sales completed. This is called a tier system and is essential in accurately calculating the final commission according to the dollar amount of sales.

Calculate override if needed.

In some companies, the commission rate can actually increase after a specific amount. So if your employee has completed sales of a certain value, their commission rate for anything sold after that would be more than it was before.

Deduct returns.

For companies that sell products or services, there is always a chance of the item being returned by the customer. In such cases, the final commission should be calculated after deducting the amount for returns as well. The commission rate should then be applied to the final amount.

Split the commissions.

Commissions are not always individual and personal. If a team achieves a certain sales amount for the quarter and there are an “n” number of members in the team, then the final amount would be divided among the “n” members equally.

Calculate the manager’s portion.

Lastly, the final commission depends on whether the sales manager or area manager gets a cut from an employee’s commission or not. If he takes a percentage, the amount must be deducted from the final payment.

Example of Commission Calculation

These steps can be understood more clearly with a numerical example.

  1. Consider that the commission period is a month and the commission would be calculated based on the number of sales an employee performs every month. In this method, commission payments will happen every month.
  2. So if an employee sells Rs 10,000 worth of products in April, their commission base will be Rs 10,000.
  3. The employee sells two products where product A has a commission rate of 5% while product B has a commission rate of 8%. He sold Rs 5,000 worth of product A and product B respectively.
  4. The commission will now be calculated by multiplying the commission base and the rate. Hence the total commission payment is:

(Rs 5,000 X 0.05) + (Rs 5,000 X 0.08) = Rs 250 + Rs 400 = Rs 650.

  1. Suppose that a customer returned a product worth Rs 500. Keeping the commission rate at 5% for now, the total commission in that case becomes:

Rs 10,000 – Rs 500 = Rs 9,500

(Rs 9,500 X 0.05) = Rs 475

  1. If the sales manager gets a 5% share from the commission of every employee, then the final commission will become:

Rs 475 – (Rs 475 X 0.05) = Rs 451.25

Takeaway

Commission calculation is an important part of the organization and can be necessary to motivate your employees. When employees have full visibility about the commission process and how much they’ll receive for achieving a certain milestone, they’ll work more diligently to achieve it. While it could be done manually with the help of spreadsheets and ledgers, there are several sales compensation platforms and automation platforms that allow seamless commission calculation.

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