Commissions

HR in NY

I have a question on commissions. I don't really understand the formula that we use. It was developed by a Sales Manager about 10 years ago and only about 20% of our Sales force is still on this formula. The rest are on straight salary. Anyway, my question is can we deduct bad debt reserve from their monthly commission check? At the end of the fiscal year if there is no outstanding delinquent debt on any of their accounts we pay it back. If there is outstanding debt we do not pay it back. Is this legal? We have a very unhappy Sales Rep who has threatened to go to the labor board. Should we get an attorney? Thanks as always for your help.

marc

Is this part of some employment contract? Or is it just a policy that the sales force signed up for. Either way, somewhere you should have this EE's signature on the dotted line about how your commission payments work. In which case, you are on solid ground to manage it that way. No business man likes to pay a commission on a sale that did not generate dollars, and conversely, no salesman likes to be dinged for dollars they generated and it was up to someone else to collect. That is why these policies are in place up front, there is no disagreement then.

Don D

The bad debt reserve you speak of....Is that a debt the employee somehow owes that you want to deduct, or is it a debt owed by the account to which he made a sale? In the latter case, I cannot imagine in my wildest stretch deducting that from the salespersons wages or commission or bonus. What possible control might he/she have over that? What a disincentive. Please explain.

HR in NY

Good questions Don. This commission structure was created in 1990 by the Sales Manager at that time. This is what the original documentation outlined concerning the bad debt reserve. Account balances in excess of 2 periods (3 times their terms or more) will be considered delinquent and assessed to the Sales Rep. That portion of the accounts receivable balance in excess of 2 periods will be multiplied by a 5% annualized service charge, and this amount will be deducted from the Sales Rep total monthly commissions. The Sales Rep in question has been with us for 9 years and started on full salary. He was given the option after 1 year of employment to go to 50% commission and a guarantee of X amount of dollars which he has been on ever since. Each month they are given a commission worksheet that shows all of the numbers and calculations so there has never been any secrets. This year the Sales Rep had an debt that was never collected and it counted against him. I guess that was the straw that broke the camals back. Personally I have always had a problem with the bad debt reserve and have had several conversations with my boss and Sales Management. It's been done this way for 13 years. Sales Management actually has been working on a new commission structure and there even has been talk of putting all Sales Reps on salary. Believe me when I say they are well compensated. We have lots of incentives for them and each month most of them receive what we call "Spiff" checks. We only have a 1% turnover in this department so I guess we are doing something right. Sorry I got so long winded. Are we in trouble here?

marc

I don't think you are in trouble. This arrangement was chosen by the Sales Rep, presumably with full knowledge regarding the commission structure, including the bad debt reserve.

From the Sales Reps side, it could be looked at as a disincentive, but depending on the type of product sold, and the mechanism in place for approval of sales, the Company is trying to protect themselves from sales transactions that are 'bad' transactions. Some products can be sold to customers that are not in a real position to complete the transaction. I can think of low or nothing down transactions with highly leveraged individuals or companies. The company is at risk for the entire length of time and just wants to share the risk with the Sales Rep.

I worked in one business that assessed several 'risk factors' associated with a customer (essentially credit scores and down payment amounts). Three levels were used. An "A" sale received immediate full commission. A "B" sale received 1/2 commission immediately with the second half deferred until the customer had made several payments. A "C" sale had the entire commission deferred for one year.

This business involved some high commissions and high sales volume. It shared the collection risk with the Sales Rep. Plenty of spiffs, like bonuses for all cash deals, volume kickers, etc.

I explained all of this because the business can have characteristics that make it reasonable to share this risk. It may not be like selling widgets to long established clients and customers.

Hope this helps.