Commission Calculator: Flat, Tiered & Draw Plans

Three commission plans, three very different paychecks

Commission sounds simple: sell more, earn more. The plan design decides how much more. The same $120,000 month can pay a rep $6,000, $8,000, or $12,000 depending on whether the plan is flat, graduated, or retroactive. Before you sign a comp plan or build one, run the numbers for a bad month, a normal month, and a great month.

A flat plan pays one rate on every dollar. At 5 percent, $120,000 in sales pays $6,000. It is easy to explain and easy to audit, but it gives no extra push once a rep has hit quota.

Graduated tiers: each rate applies to its own slice

A graduated (or marginal) tier plan works like income tax brackets. Each rate applies only to the sales inside its band. With tiers of 5 percent up to $50,000, 7 percent from $50,000 to $100,000, and 10 percent above that, $120,000 in sales pays $50,000 × 5% = $2,500, plus $50,000 × 7% = $3,500, plus $20,000 × 10% = $2,000. Total: $8,000, an effective rate of 6.67 percent.

The effective rate is the number to compare across job offers. A plan advertising '10 percent at the top tier' may average far less.

Retroactive tiers: the cliff

A retroactive plan pays the whole amount at the rate of the highest tier reached. Using the same tiers, $120,000 pays 10 percent on everything: $12,000. That is $4,000 more than the graduated version for the exact same sales.

It is a powerful motivator, and a dangerous one. At $100,000 the rep earns $7,000 at 7 percent. One more dollar, $100,001, pays $10,000.10. That $3,000 cliff encourages reps to hold deals or pull them forward to jump a tier. If you run a retroactive plan, set quarterly rather than monthly periods to blunt the gaming.

Draw against commission, explained with numbers

A draw is an advance so reps have steady income while deals close. Each period the company pays the draw, then compares it with commission actually earned. If commission is higher, the rep gets the difference as a true-up. If it is lower, what happens next depends on the type of draw.

With a recoverable draw, the shortfall is a balance the rep owes and is deducted from future commission. Say the draw is $5,000 and March commission is $3,200. The rep is paid $5,000 and now owes $1,800. In April commission is $8,000. First $1,800 is recovered, leaving $6,200. That beats the $5,000 draw, so the rep is paid $5,000 plus a $1,200 true-up, and the balance is back to zero.

With a non-recoverable draw, the shortfall is forgiven. It works as a guaranteed minimum, common for new hires during ramp-up. Enter the unrecovered balance in the calculator and it runs this true-up logic for you.

Tax and wage-law points reps miss

Commissions paid to employees are supplemental wages. When an employer pays them separately from regular wages, it may withhold federal income tax at a flat 22 percent (37 percent on supplemental wages above $1 million in a year). That is withholding, not your final tax, so a big commission check can look smaller than expected and be partly refunded in April.

Commissioned employees still must earn at least minimum wage for all hours worked. For overtime, commissions count toward the regular rate, which raises the overtime rate of non-exempt reps. Inside sales staff in retail can be exempt from overtime only when their regular rate is more than 1.5 times minimum wage and more than half their pay comes from commission. Outside sales reps who work away from the office are exempt entirely.

Several states, including California and New York, require commission plans to be in writing and signed. Recovering an unearned draw from a rep's final paycheck is restricted in some states, so read the plan's termination clause before you rely on a recoverable balance.

Designing a plan that works

Start from target earnings. If a rep should make $90,000 at a $1.2 million annual quota with a $50,000 base, the variable pay is $40,000, which is a 3.33 percent effective rate at quota. Build tiers so the effective rate at quota lands there, then make rates above quota noticeably richer so over-performance pays. Check the plan against gross margin, not revenue; a 10 percent commission on a 15 percent margin product eats two-thirds of the profit. The profit margin calculator helps with that part.