Compensation Management Glossary

Accrued Commission

The term Accrued Commission (also known as Pending Commission) describes a situation where a commissionable portion has not yet been paid out to a sales rep. The term is used because the commission has been earned based on the sales booked, but it has not yet been paid out, as the payment is contingent on i.e. the customer fulfilling their invoice.

Clawback

Clawbacks in compensation plans have become an essential tool for companies looking to mitigate risks associated with executive pay and bonuses. These provisions allow organizations to recover compensation that has already been paid out under certain circumstances, typically when the payment was based on financial results or other performance metrics that later prove to be inaccurate or fraudulent.

As companies navigate complex regulatory environments and increasing stakeholder scrutiny, incorporating clawbacks into compensation plans can provide an additional layer of protection. However, understanding when and how to use clawbacks effectively is crucial for optimizing incentive models and ensuring fair and transparent compensation practices.

An example where a clawback would be beneficial is when companies operate in very transactional markets i.e. SME where contracts often are signed by people who does not have the right to sign on behalf of their company.

Cliff Vesting

Cliff vesting refers to a situation where employees become fully vested in their benefits all at once after a specific period. For instance, an employee might become fully vested after three years of service, with no partial vesting before that time.

Commission

Commission refer to fees or compensation that are typically paid to someone for performing a specific service or task, often involving facilitating a transaction or sale. Commissions are commonly used in various fields, including sales, real estate, finance, art, and more. The payment can be a percentage of the value of the transaction or a flat fee.

Different types of commission include:

• Percentage-Based: Often, commissions are a percentage of the transaction's value. For example, in sales, this incentivizes the salesperson to close higher-value deals.

• Flat-Rate: Some commissions are fixed amounts, regardless of the transaction's size. This is common in some service industries.

• Tiered Commission: The rate might increase based on performance. For instance, selling more than a certain amount may increase the commission percentage.

• Draw Against Commission: A guaranteed minimum income paid upfront, which is deducted from future commissions.

Commissions align the interests of the person providing the service with the success of the transaction, incentivizing them to perform well.

Compensation Plan

A compensation plan is a structured system that outlines how employees are rewarded for their work. It details the total package of compensation that employees receive, which can include a combination of salary, wages, bonuses, benefits, and other forms of financial and non-financial rewards.

Example Scenario: A tech company might have a compensation plan that includes a base salary, an annual performance bonus, stock options with a four-year vesting schedule, health insurance, and 15 days of paid vacation per year. Sales roles might include additional commissions based on revenue generated.

Overall, a compensation plan is a crucial element of a company’s human resources strategy, designed to attract, motivate, and retain employees while aligning their efforts with the organization’s goals.

Compensation Policy

A compensation policy or incentives policy is a formal set of guidelines and principles that an organization establishes to govern how employees are compensated and rewarded for their work. This policy outlines the structure, criteria, and practices related to employee pay, bonuses, benefits, and other incentives, ensuring consistency, fairness, and alignment with the company’s goals.

Deferred Commission

Deferred Commission describes a situation where the sales representative earns commission when the sale is booked, but payment of the commission is deferred until the customer pays the invoice. This ensures that the company only pays out commissions on revenue that has been actually received, improving the company's liquidity and cash flow.

Draw Against Commission

A guaranteed minimum income paid upfront, which is deducted from future commissions. A draw against commission is a payment structure used primarily in sales roles where an employee receives an advance on their expected future commissions. This draw is essentially a loan or advance from the employer that is later repaid through the commissions the employee earns. If the commissions earned are equal to or greater than the draw, the employee keeps any excess amount. If the commissions are less than the draw, the difference may need to be paid back, or it might be carried over to the next period.

The draw against commission structure provides a safety net for employees, ensuring they have a stable income even during slow sales periods. It also motivates them to sell more, as their total earnings will increase with higher sales performance.

In general, draws can be structured as the following types: Recoverable, Non-Recoverable, and Hybrid or Graduated.

Equity-Matched Incentive (EMI)

Equity-Matched Incentive (EMI) is a compensation scheme where employees receive equity or stock options in addition to their regular salary and potentially other performance-based incentives. This type of incentive aligns employees' interests with the long-term success of the company by providing them with a stake in the company's equity.

Key Aspects of Equity-Matched Incentives:

1. Equity Component: Employees are granted shares, stock options, or other forms of equity as part of their compensation package. This gives them an ownership interest in the company.

2. Matching Structure: The term "matched" typically means that the company will provide equity awards that are designed to complement other forms of compensation or bonuses. For example, if an employee achieves certain performance targets or milestones, the company may issue additional shares or options.

Flat-Rate Decelerator

A flat-rate decelerator is a commission model designed to modify a salesperson's or agent's earnings according to their performance. It generally activates when salespeople surpass specific sales goals or benchmarks.

Here’s how it works:

1. Flat-Rate Commission: Initially, a salesperson might earn a flat-rate commission for each sale they make, regardless of the sale amount.

2. Decelerator Trigger: When the salesperson’s performance surpasses a specific target or threshold, the commission rate starts to decelerate, meaning it decreases. This can be intended to control costs, manage profitability, or balance incentives.

3. Reduced Earnings: After reaching the threshold, the commission rate might decrease for subsequent sales. For instance, if a salesperson hits a high sales target, their flat-rate commission might be reduced for sales beyond that target.

Example:

• Flat Rate: A salesperson earns $100 per sale up to $50,000 in sales.
• Trigger: After reaching $50,000 in sales, the flat-rate commission decreases to $75 per sale for any amount beyond this threshold.

The flat-rate decelerator is designed to manage costs and ensure that the compensation plan aligns with the company's budget while still motivating employees to perform well. It creates a balance between rewarding high performance and controlling excessive compensation costs.

Forfeited Commission

The term Forfeited Commission describes the situation where the sales rep loses the right to receive the commission because the conditions (e.g., customer payment within a specified time frame) were not met. The earned commission is effectively canceled or voided due to the non-fulfillment of the payment condition within the allowable period.

Fringe Benefits

Fringe benefits are additional perks or non-wage compensations provided to employees beyond their regular salary or hourly wage. These benefits enhance the overall compensation package and can significantly contribute to employee satisfaction, retention, and well-being. Fringe benefits can vary widely depending on the employer and the industry.

Common Types of non-monetary Fringe Benefits:

1. Health and Wellness Benefits:

   • Health Insurance: Coverage for medical expenses, including doctor visits, hospital stays, and prescription drugs.
   • Dental and Vision Insurance: Coverage for dental care and eye care, often separate from general health insurance.
   • Wellness Programs: Access to fitness centers, gym memberships, or wellness activities to promote healthy living.

2. Work-Life Balance Benefits:

   • Paid Time Off (PTO): Vacation days, personal days, and sick leave.
   • Flexible Work: Options such as remote work, flexible hours, or compressed workweeks.

3. Other Perks:

   • Educational Assistance: Tuition reimbursement, scholarships, or training programs to support continued education and professional development.
   • Transportation Benefits: Subsidies for public transportation, company cars, or parking allowances.
   • Meals and Snacks: Free or subsidized meals, snacks, or beverages provided at the workplace.
   • Employee Discounts: Discounts on company products or services, or those offered through partnerships with other businesses.

Graded Vesting

Graded vesting refers to a situation where employees gradually become vested in their benefits over time. For example, an employee might become 20% vested each year over five years, reaching full vesting at the end of the fifth year.

Graduated Draw

A Graduated Draw, the same as a hybrid draw, is a combination of recoverable and non-recoverable draws, where only a portion of the draw is recoverable, or the terms change based on performance over time. It is typically used in compensation plans where part of the sales commission is paid upfront to sales reps ensuring they receive income in slow sales periods.

Incentive Model (or Incentive Program)

An incentive model is a structured framework used by organizations to motivate and reward employees, teams, or other stakeholders based on their performance or achievement of specific goals. These models are designed to align the interests of the individuals with the goals of the organization, driving behaviors that contribute to the company’s success.

Key Aspects of an Incentive Model:

1. Purpose and Objectives: The primary purpose of an incentive model is to encourage desired behaviors and outcomes. This could include increasing sales, improving customer satisfaction, enhancing productivity, reducing costs, or achieving specific business milestones.

2. Types of Incentives:

   • Monetary Incentives: These include cash bonuses, commissions, profit-sharing, stock options, or other financial rewards tied to performance.
   • Non-Monetary Incentives: These include recognition, awards, extra vacation days, professional development opportunities, or other benefits that contribute to job satisfaction.

3. Performance Metrics: The model is based on clearly defined performance metrics or key performance indicators (KPIs), i.e. Sales Efficiency metrics. These metrics could be individual, team-based, or company-wide, depending on what the model aims to achieve.

4. Incentive Structure: The incentive model outlines how rewards are distributed. This could be through fixed bonuses, variable pay based on performance levels, tiered incentives, or other structures that reward higher performance with greater rewards.

5. Eligibility and Participation: The model defines who is eligible for incentives and how they can participate. This could include all employees, specific departments, or individual roles such as sales teams or executives.

6. Time Frame: Incentive models usually operate within a specific time frame, such as quarterly, annually, or tied to the completion of a project. The timing of incentives can affect motivation, encouraging sustained performance over time or targeting specific periods.

7. Alignment with Organizational Goals: Effective incentive models are designed to align with the overall goals of the organization. For example, a company focused on growth might use an incentive model that rewards sales growth or market expansion, while a company focused on innovation might incentivize creative solutions or new product development.

Example Scenario:

A company might implement a sales incentive model where sales representatives earn a base salary plus commissions on sales above a certain threshold. Additionally, there might be tiered bonuses for reaching higher sales targets, with the top performers receiving recognition and additional rewards.

In summary, an incentive model is a strategic tool used to drive specific behaviors and outcomes within an organization by rewarding performance that contributes to its success. It helps motivate employees, align their efforts with business objectives, and ultimately improve overall performance.

Non-Recoverable Draw

A Non-Recoverable Draw is guaranteed income. If the commissions are less than the draw, the employee does not have to repay the difference. This is more like a guaranteed minimum salary. It is typically used in compensation plans where part of the sales commission is paid upfront to sales reps ensuring they receive income in slow sales periods.

On-Target Earnings (OTE)

On-target Earnings (OTE) refer to the total potential earnings an employee can achieve if they meet all their performance targets and goals. This figure typically includes base salary, commissions, bonuses, and any other financial incentives tied to performance metrics. OTE is commonly used in sales and performance-driven roles to provide a clear picture of the maximum compensation an employee can expect when they perform at their best.

Override

A sales commission override is a type of compensation structure in which a manager or higher-level salesperson earns a commission on the sales generated by the salespeople they oversee or manage. This is an additional commission, "overriding" the regular commission that the salesperson earns on their own sales.

Percentage-Based Commission

Percentage-based commission is a compensation structure where an employee earns a commission based on a percentage of the sales or revenue they generate. Instead of receiving a fixed amount per sale or transaction, their earnings are calculated as a percentage of the total sales value.

For example, if a salesperson sells $10,000 worth of products and their commission rate is 5%, they would earn $500 in commission (5% of $10,000).

Key features of percentage-based commission:

1. Direct Link to Sales Performance: Earnings are directly proportional to the amount of sales generated. Higher sales result in higher commissions.

2. Flexibility: The percentage can vary based on different factors, such as the type of product sold, the salesperson’s performance, or specific company policies.

3. Motivational: It incentivizes employees to increase their sales efforts since their income grows with their sales volume.

This structure is commonly used in sales roles, real estate, and other industries where performance directly impacts earnings.

Premium

A premium in commission refers to an additional or enhanced commission rate that is paid to a salesperson for achieving specific targets or exceeding performance benchmarks. This premium is above the standard commission rate and is designed to further incentivize high performance, rewarding salespeople for outstanding results.

A premium is a way to reward and motivate salespeople for exceptional performance, encouraging them to strive for higher levels of success and contributing to the overall growth of the company.

Profit-Sharing

Profit sharing is a compensation strategy where employees receive a share of the company's profits in addition to their regular salary or wages. It typically involves distributing a portion of the company’s profits to employees based on predefined criteria, such as company performance, individual contributions, or a combination of both.

The distribution can be in the form of cash bonuses, stock options, or contributions to retirement plans. Profit sharing aims to align employees' interests with the company’s financial success, motivating them to contribute to the organization’s growth. It can enhance job satisfaction, attract and retain talent, and foster a sense of ownership among employees. The specifics of profit sharing plans can vary widely depending on company policies and legal regulations.

Prorate

Prorating in commission refers to the process of adjusting a commission payment to reflect the portion of a period or the portion of a target that has been completed. This is often used when an employee or salesperson has not worked the entire period or when a sales goal or target is only partially achieved. Prorating allows for equitable compensation based on actual performance or time worked, ensuring that commissions are paid fairly relative to the portion of work or sales completed.

Quota-Based Decelerator

A quota-based decelerator is a commission structure where the commission rate decreases as a salesperson’s performance exceeds a predetermined sales quota or target. This model is designed to control costs and manage profitability while still incentivizing high performance.

Here’s how a quota-based decelerator typically works:

1. Set Quota or Target: The company sets a sales quota or target that represents a benchmark for expected performance. For example, a salesperson might have a quota of $50,000 in sales.

2. Commission Above Quota: Salespeople earn a certain commission rate for sales up to the quota. For example, they might earn 5% commission on sales up to $50,000.

3. Decelerator: Once the salesperson exceeds the quota, the commission rate for additional sales starts to decrease. For instance, sales beyond the $50,000 quota might earn a reduced commission rate of 3%.

Illustrative Example:

• Quota: $50,000 in sales.
• Commission Rate up to Quota: 5% on sales up to $50,000.
• Decelerated Commission Rate: 3% on sales exceeding $50,000.

Quota-based decelerators are used to balance motivating employees to exceed sales goals while controlling compensation expenses, especially in scenarios where very high performance could otherwise lead to unsustainable commission payouts.

Residual Commission

A Residual Commission describes a compensation structure where Sales reps earn ongoing commissions for as long as their customers continue to generate revenue. This structure is common in subscription-based or recurring revenue models, and especially within partner agreements.

Example:

A sales rep sells a software subscription worth $1,000 per year. They earn a 5% commission annually as long as the customer renews. They earn $50 each year the customer stays subscribed.

Retroactive

Retroactive in commission refers to the process of applying a commission rate or payment to past sales or earnings, typically when new terms or rates have been introduced. This adjustment is made to ensure that salespeople are compensated according to the new or corrected commission structure, even for sales that were made before the changes took effect.

Retroactive commissions are a way to ensure fairness and accuracy in compensation, allowing salespeople to benefit from improved commission terms or corrections, even for sales that were completed before the new terms were in place.

Roll-up

A roll-up in commission refers to a compensation structure where the sales performance and resulting commissions of subordinate salespeople or teams are "rolled up" or aggregated to the credit of a higher-level manager or leader. This allows the higher-level manager to earn additional commissions based on the collective sales generated by their team.

In essence, roll-ups in commission structures allow managers to benefit from the aggregated performance of their teams, creating a direct financial incentive for leadership and effective team management.

Split

A split refers to the practice of dividing a commission payment between two or more parties who were involved in making a sale. This division of commission is common in situations where multiple salespeople, brokers, or agents collaborate on a single transaction, and each party receives a portion of the total commission based on their contribution or agreement.

Split commissions ensure that all parties who contributed to a sale are rewarded for their efforts, fostering collaboration and ensuring fairness in the distribution of earnings.

Step Accelerators

Step accelerators offer larger, more defined jumps in commission rates once specific sales thresholds are crossed. For instance, if a salesperson reaches 150% of their quota, their commission rate might jump from 5% to 12% on all sales above this level. Step accelerators can create strong incentives for salespeople to push hard to reach these higher thresholds.

Tiered Decelerator

A tiered decelerator is a type of commission structure that combines elements of tiered commissions with a mechanism that reduces the commission rate as sales volume increases beyond certain thresholds. It is designed to provide strong incentives for sales performance while controlling the cost of commissions for higher sales levels.

Here’s how a tiered decelerator typically works:

1. Tiered Commission Rates: Salespeople earn different commission rates based on their sales volume, with rates increasing as they hit higher sales thresholds. For example:

   • Tier 1: 5% commission on sales up to $10,000.
   • Tier 2: 7% commission on sales between $10,000 and $20,000.
   • Tier 3: 10% commission on sales above $20,000.

2. Decelerator Mechanism: After surpassing a specific sales threshold, the commission rate for additional sales can start to decrease. This deceleration can be applied in various ways, such as:

   • Reducing the Percentage: The commission rate may decrease for sales that exceed the highest tier. For instance, if sales exceed $30,000, the rate for sales beyond that might drop from 10% to 8%.
   • Caps on Earnings: There might be a cap on the maximum commission that can be earned, creating a decelerating effect once this cap is reached.

Example Scenario:

• Tier 1: 5% on sales up to $10,000.
• Tier 2: 7% on sales from $10,000 to $20,000.
• Tier 3: 10% on sales from $20,000 to $30,000.
• Decelerator Tier: 8% on sales beyond $30,000.

In this structure, salespeople are incentivized to reach higher sales levels with increasing commission rates up to a certain point, but once they exceed a very high threshold, their commission rate starts to decelerate. This approach helps manage commission expenses while still rewarding high performance. 

Time-Based Decelerator

A time-based decelerator is a commission structure where the rate of commission earned by a salesperson decreases over time, typically as a way to manage costs and control the compensation payout while maintaining incentives for sustained performance.

Here’s how a time-based decelerator typically works:

1. Initial Commission Rate: Salespeople earn a higher commission rate for a certain period or a certain amount of sales generated within that initial period.

2. Time-Based Reduction: As time progresses, the commission rate decreases. This reduction can be based on a specific time frame, such as monthly, quarterly, or annually, or it might depend on the duration since the salesperson achieved a significant milestone or quota.

Let's continue with an example:

• Initial Period (e.g., First Quarter): A salesperson might earn a 10% commission on all sales.
• Subsequent Period (e.g., Second Quarter): After the initial period, the commission rate decreases to 7% on all sales.
• Further Reduction (e.g., Third Quarter): The rate might drop further to 5% if the performance continues into a longer time frame.

Time-based decelerators are particularly useful in scenarios where a company wants to offer strong incentives to ramp up performance quickly but also needs to manage overall compensation expenses as salespeople continue to perform over time.

Threshold

A threshold in commission refers to a predefined level of performance or sales that must be achieved before a salesperson becomes eligible to earn commissions. This concept is often used in commission structures to ensure that commissions are only paid out after a minimum target or quota has been met.

UFC (Uniformed Franchisee Compensation)

This term can be used in the context of franchise systems where uniform compensation structures are applied across different franchisees. It may include commission structures or other performance-based incentives.

Variable Compensation Plan

A VCP is a structured plan that outlines how variable compensation, such as commissions or bonuses, is earned based on performance. It defines the criteria, targets, and payout structure for performance-based earnings.

Variable Pay Incentive

Variable Pay Incentive refers to any incentive that is part of a variable pay structure, such as commissions, bonuses, or profit-sharing, which varies based on performance metrics or achieving specific targets.

Variable Sales Allowance

Variable Sales Allowance (VSA) refers to allowances or adjustments made to sales commissions based on performance or specific conditions. It is less common but might be used in certain industries to describe adjustments to commission calculations.

Vesting

Vesting is a process by which an individual gains full ownership of certain benefits or rights, typically related to compensation, over time. In the context of employment and compensation, vesting usually refers to the acquisition of ownership of benefits such as stock options, retirement contributions, or other forms of deferred compensation.

YTG (Year-To-Go)

YTG (Year-To-Go) refers to the remaining time left in the year. It can be relevant for forecasting and planning commission payouts or setting sales targets for the remainder of the year.

Zero Outstanding Targets (ZOT)

Zero Outstanding Targets (ZOT) is a term used to describe a situation where all sales targets or performance goals have been met. In some commission structures, achieving zero outstanding targets could trigger additional bonuses or commission rates.