Accounting Best Practices, Fifth Edition

8–2. Calculate Final Commissions from Actual Data

A common arrangement for departing salespeople is that they are paid immediately for the commissions they have not yet received, but which they should receive in the next commission payment. Unfortunately, the amount of this commission payment is frequently a guess, since some sales have not yet been completed and orders have not even been received for other potential sales on which a salesperson may have been working for many months. Accordingly, there is usually a complicated formula in the typical salesperson’s hiring agreement that pays out a full commission on completed sales, a partial one on orders just received, and perhaps even a small allowance on expected sales for which final orders have not yet been received. The work required to complete this formula is highly labor-intensive and frequently inaccurate, especially if an allowance is paid for sales which may not yet have occurred (and which may never occur).

A better approach is to restructure the initial sales agreement to state that commissions will be paid at the regular times after employee termination until all sales have been recorded. The duration of these payments may be several months, which means that the salesperson must wait some time to receive full compensation, but the accounting staff benefits from not having to waste time on a separate, and highly laborious, termination calculation. Instead, they take no notice of whether a salesperson is still working ...