How to calculate sales commission

The basic formula

Commission is revenue times a rate. Close $85,000 in a month on an 8% plan and you've earned $6,800. A spreadsheet handles this fine, right up until the plan gets tiers.

commission = revenue × rate

Where the rate comes from: OTE and quota

Most B2B teams don't pick a rate directly. They start from pay: on-target earnings (OTE) split into base salary and variable comp, and the quota converts the variable half into a rate.

rate = (OTE − base salary) ÷ annual quota

A rep on $150,000 OTE with a $90,000 base and a $1,200,000 annual quota has $60,000 of variable comp, which over that quota is a 5% rate. Hit quota exactly and the year pays $150,000. Move the quota and the rate moves with it.

Open this plan in the calculator and drag the attainment slider. Every number below shows up there.

Settling a month

Quota plans settle by period, not by deal. Monthly quota here is $1,200,000 ÷ 12 = $100,000, so a rep who books $87,000 is at 87% attainment and earns $87,000 × 5%, or $4,350. Tiers, caps and true-ups all need a period to apply to.

Tiers and accelerators

Most plans raise the rate above 100% of quota. Dollars past the boundary pay the base rate times a multiplier, so with a 1.5× accelerator a $130,000 month splits in two: $100,000 at 5% is $5,000, and the remaining $30,000 at 7.5% is $2,250, for $7,250. A flat 5% would have paid $6,500.

The accelerator applies only to revenue inside its band. Some plan documents mean something different: the higher rate applied retroactively to the whole month once quota is crossed. At 101% attainment those two readings are thousands of dollars apart, so check which one your plan says before you compute anything.

Kickers

A kicker is a one-time bonus for crossing a milestone; it's a step, not a rate change. A 10% kicker at 100% pays 10% of monthly variable comp, and monthly variable here is $60,000 ÷ 12 = $5,000, so crossing quota adds $500 on top of what the tiers pay. At 99.9% it pays nothing. Open this plan with the kicker.

Caps and floors

A cap limits what a month can pay out. A floor guarantees a minimum, and mostly turns up in new-hire ramps. When both apply you need a rule for which one wins; in Earnest the floor does.

Where hand calculations go wrong

Four things account for most of the commission disputes we hear about:

• Paying on the wrong number. Total contract value, first-year revenue and collected cash are different amounts. A plan that never names which one it pays on will be read one way by finance and another by the rep.
• Rounding per deal. Rounding each deal to cents and summing gives a different total than computing the period and rounding once. The gap is a few cents, which is enough to make a rep's statement disagree with the ledger.
• Retroactive accelerators. See above; write down which reading your plan means.
• Forgetting clawbacks. A deal refunded in March was paid out back in January, and that money has to come out of a later period. In the month it lands, the payout won't match revenue × rate, so it needs a line of its own.