When are commissions earned?

I am updating a sales comp plan and by Indiana law we must pay our employees within 10 days of earnings. This is straightforward for base pay but when it comes to commissions the date a commission is earned seems to be open to interpretation. I have heard when the sale is booked, invoiced, or paid. Can anyone tell me if there are any hardfast rules here or is this something that as a company we can define when commissions become earnings?


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  • In my experience, which does not include Indiana, you are free to define what constitutes a sale.  I would avoid abusive or outlandish definitions.

    Where you put the point of compensation depends a lot on how much financial risk you wish to assume.  If you pay someone for a sale that doesn't actually happen and they jump ship, you will have a hard time getting it back.  The safest route is when or as paid.  The riskiest route is when booked by the sales rep.  When invoiced is less risky and when the invoice is approved by the client is less risky still, assuming the client has the means to pay.

  • I should mention that there are levels of complexity involved, as well.  A lot of times, a sales manager will insist his or her people get paid sooner than makes sense to anybody else.  That's just part of motivating the people who bring in the money that pays for HR paychecks.  In those situations, having a hold-back account that new sales people have to fill up by sacrificing x% of their commissions into is a safety net for the company.  However, if the company doesn't actually escrow the money and ensure it can pay out its liabilities, it can get in serious trouble over this.


    So, essentially, you have no risk (as paid) or all risk (as reported) or a world of possibilities in between, and you mitigate the risk with a hold back account or other accounting device.  It adds to the complexity and cost of payroll administration but can be worth it big time in terms of keeping sales people sucking at the drinking fountain of cash so that they will go sell more stuff.

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