Welcome to this resource for sales compensation terms and definitions. There are a lot of confusing terms used in sales compensation. This glossary will try to alleviate that confusion so you focus on improving sales performance.
Terms and definitions like these should be used in your commission agreements/contracts to ensure consistency and understanding. Receive a sample commission contract to see how these can be used.
These terms and definitions are commonly used compensation terms. There is no absolute set of terms or industry standards so it is not uncommon to see alternative terms with a similar meaning. You should have your legal representative review the terms before using them in your agreements.
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Accelerator Payment
An accelerator payment is an overachievement payment for attainment over 100%. Commission rates and quota rates move to an accelerated rate when the Participant achieves the annual quota. Sometimes people use this term like ramped rates and would qualify the idea of the rate to be paid over quota in another way such as: "Over quota accelerator".
Accruals
Accruals are the estimation of payment expenses based on earnings. Because of the large amount of money spent on commissions, it is customary for the compensation administrator to calculate accruals prior to actual payment of commissions.
Alignment
Alignment refers to the extent that a sales compensation program is aligned with the key business objectives of the company. It also refers to the extent that sales compensation plans for different job roles are aligned to motivate teamwork across sales roles.
As Earned
As Earned describes a scenario where the timing of payment made occurs in the same period the attainment of the incentive was reached.
Assignment
In order to ensure that a customer is not inundated with multiple reps calling from the same company, it is typical to assign prospects to a person in a sales role. Often an assignment is referred to as a "territory" and can be based on an account id, name, channel, area code, zip code, product, team, roll up, etc. Assignments are usually made at a position level so if an individual moves out of the position, the assignment stays with the position and does not move with the individual.
Attainment
Attainment is the degree to which an incentive measure is met for a measurement period. Attainment can be in units, dollars or points.
Attainment Percent aka Performance
Attainment percent is the achievement relative to an incentive measure, most commonly quota.
Award
An award is a form of payment that is given in the context of a recognized event. Awards can be in the form of money, prizes, plaques, or public recognition.
Base Rate
The initial rate paid for expected performance. The base rate may be applied up to 100% of quota or goal.
Base Salary
A base salary is a fixed payment amount that can be paid monthly, semi-monthly, weekly, depending on the company's policy.
Bluebird
A bluebird is an unusually large sale creating exceptional earning for a participant.
Bookings
Booking is a sales order, often signed.
Booking Date aka Order Date.
The booking date is the date the order is signed and accepted by the company.
Bonus
A bonus is an opportunity to earn money for achieving specific results. Often companies view bonuses as stretch goals or an area of emphasis.
Cancellations
When orders are cancelled the commission and bonus payments that have been made are usually no longer considered earned. A policy should be put in place to recover any payments that were made.
Cap
A cap is a maximum amount a participant can earn in a given period for an incentive measure or all incentive measures combined. Caps can dilute motivation.
Claw-Back
A claw back is when an overpayment is taken back or recovered. See Recovery.
Commission
Commission is variable pay tied to sales revenue, unit sales, profit or some other volume-based metric.
Commission Accruals
Accruals are the estimation of payment expenses based on earnings. Because of the large amount of money spent on commissions, it is customary for the compensation administrator to calculate accruals prior to actual payment of commissions.
Commission Earnings
Commission earnings are determined by the credit amount of the commissionable event times the commission rate. Once a commission is earned, the company must track the expense as a liability even if they don't pay the earnings until a later event. Example: earnings can be calculated at booking but payment doesn't occur until cash receipt.
Commission Payment
Commission payment is the amount of commission paid to the Participant. It may occur at a different time than earnings. See commission accruals.
Commission Rate
The commission rate is the rate applied to the volume measure for incentive payment. It can be expressed as percent or dollars. The commission rate is multiplied by the volume measure to calculate commission earned.
Cost of Sales
A relative measure of internal costs per each sale. The internal costs are generally those that are directly related to making the sale.
Costing
Costing is analysis done to estimate the cost of the sales compensation plan(s). This is also known as modeling or cost modeling.
Crediting
The process in which you determine which participant receives credit for the sales event and how much will count. For companies with complex selling processes it is best practice to credit multiple positions to encourage team work and avoid channel conflict.
Credit Amount
The credit amount is counted by incentive measure for a particular period. Credits determine quota or other measure attainment and will be used to calculate commission or bonus payment.
Credit timing
Credit timing is the point at which the credit is counted. Examples of credit timing include book date, ship date, sold date, invoice date, payment date, and order date.
Draw
Draw is a cash advance for a participant when specified in an offer letter and may either be recoverable or non-recoverable. A non-recoverable draw is a guarantee to earn a specific amount regardless of earnings. A recoverable draw is expected to be paid back to the company with future incentive earnings.
Direct credit
The credit to the participant who has direct contact with the customer.
Direct sales position
A position that is directly responsible for closing business with the customer. This position produces orders.
Discretionary Bonus
A discretionary bonus is a periodic additional bonus opportunity that is above the compensation plan. A discretionary bonus is allocated to specific individuals and is usually not determined based on formulas.
Earnings
Earnings is the amount calculated by the incentive formulas. It can be actual or planned depending on the usage. Actual earnings are what all the elements of the compensation plan calculate based on the actual attainment of the measures. Planned earnings are what all the elements of the compensation plan calculate based on 100% attainment of the measures.
Earnings Curve
A graphic representation of the planned earnings for the compensation plan
- Linear curve is a straight line
- Progressive curve increases as the attainment percentage increases. This is used when the higher levels of attainment are more difficult and more profitable. The goal is to reward the increased effort required.
- Regressive curve decreases as the attainment percentage increases. This is used when additional sales are easy and to avoid windfalls and additional sales being unprofitable.
- Combination curve uses a step rate, one or more rates to a performance level combined with other options mentioned above.
Eligibility
Eligibility is the requirements that must be met in order to participant in a compensation plan.
Excellence
Individual sales performance that is in the top percentile of all individuals whose performance is being measured. The top percentile is determined by the company but it is usually 100 -120%.
Flat Rate
A rate that remains constant regardless of the attainment level. Flat rates always result in linear earnings.
Formula
A formula is the mathematical calculation that determines the payout amount for an incentive measure such as a commission or bonus.
Goal aka Target, Quota
Goal is the expected level of attainment for the incentive measurement period. A quota is a special kind of goal. See definition.
Gross Margin
Gross margin is the selling price less the cost of the item. Companies differ in what costs they include in this calculation.
Gross Profit
Gross profit is the selling price less the cost of the item. Same as Gross Margin.
Guarantee aka Non-recoverable draw, Bridge
A guarantee is a cash advance for a participant when specified in an offer letter and is non-recoverable.
Holdback
A holdback occurs when some of the payment until another event is completed.
Hurdle
A hurdle is similar to a threshold but based on a different measure than the one that is being measured for payout.
Incentive Compensation
Incentive is a form of compensation based on a volume-based measure such as a commission and bonus, or both.
Incentive Earnings
Incentive earnings is the amount calculated by the incentive formulas. It can be actual or planned depending on the usage. Actual earnings are what all the elements of the compensation plan calculate based on the actual attainment of the measures. Planned earnings are what all the elements of the compensation plan calculate based on 100% attainment of the measures.
Incentive Formula
An incentive formula is the mathematical calculation that determines the payout amount for an incentive measure such as a commission or bonus.
Incentive Leverage
Incentive Leverage is the multiplier relationship between sales results and incentive pay. The amount of leverage is tied to the amount of compensation that is at risk and the level of control a rep has over the sale. Highly leveraged positions have a greater potential for earnings but can also make much less if they fail to attain their goals.
Incentive Measure
Incentive measures are the metrics to be used to determine incentive pay. Examples of incentive measures are sales revenue, sales units, profitability. Also referred to as Performance Measure.
Incentive Pay
Incentive pay is a general term meaning any or all variable pay elements.
Individual Rate
A commission rate that is unique per individual instead of per plan.
Invoice Date
The Invoice Date is the date the invoice was created.
Leverage
Leverage is the multiplier relationship between sales results and incentive pay. The amount of leverage is tied to the amount of compensation that is at risk and the level of control a rep has over the sale. Highly leveraged positions have a greater potential for earnings but can also make much less if they fail to attain their goals.
Liability
A liability arises when the Participants is overpaid. Overpayments can result from returns, cancellations, processing errors, split claims and other related causes.
Linked Incentive Measure
A method of compensating based on more than one measure. The targets and breakpoints are unique per measure.
Matrix
A method of using two measures that are often opposing. The targets and breakpoints are unique per measure combination. The rate is determined by the intersection of the two performances. Rates can be flat or ramped or both.
Measure
Incentive measures are the metrics to be used to determine incentive pay. Examples of incentive measures are sales revenue, sales units, profitability. Also referred to as Performance Measure.
Milestones
A milestone is a discernable point of progress in the selling or implementation cycle.
Mix
The relationship of the elements in the compensation plan expressed as a percent. It may be salary and incentive relative to Target Total Compensation or commission and bonus relative to Target Incentive Compensation.
Modeling
Modeling is used to estimate the cost of the plan or all plans under various scenarios, varying things like number of participants, attainment, rates, etc.
Net Price
Net price is the list price minus discounts and allowances.
Order Cancellations
When orders are cancelled the commission and bonus payments that have been made are usually no longer considered earned. A policy should be put in place to recover any payments that were made.
Order Date aka Booking Date
The order date is the date the order was signed and accepted by the company.
Overlay credit
An overlay credit is a credit to participants that do not have direct influence over the customer when placing the order.
Overlay position
An overlay position is not directly responsible for closing the business with the customer. Examples include a regional sales manager, system engineer, etc.
Overpayment
Overpayment occurs when a rep has been paid more than they earned resulting from cancelled orders, processing or crediting errors or other related causes.
Payout Frequency
Payout frequency is the timing of incentive payments. The frequency can be monthly, quarterly, annually, etc.
Plan Participant
A plan participant is a person on an incentive compensation plan
Performance Percent aka Attainment percent
Attainment percent is the achievement relative to an incentive measure, most commonly quota.
Performance Measurement
Performance measurement is the appropriate measure to evaluate the sales results and includes expectations (goals and quotas) and the ability to track the actual accomplishment.
Performance Period
The performance period is the time span over which the performance is measured for incentive purpose.
Plan Alignment
Plan alignment refers to the extent that a sales compensation program is aligned with the key business objectives of the company. It also refers to the extent that sales compensation plans for different job roles are aligned to motivate teamwork across sales roles.
Plan Eligibility
Plan eligibility is the requirements that must be met in order to participant in a compensation plan.
Plan Summary
Plan summary includes responsibilities for the role, goals, earning curve, mix strategy, and incentive elements.
Pro-rated
A proportional calculation of a goal or a rate. Often used for new hires or transitional plans.
Quota
Quota is the expected level of attainment assigned to a Participant for the primary sales measures. Quotas are generally annual but often are subdivided into quarterly or monthly quotas and prorated based on seasonality of the product.
Quota Rate
A quota rate is the rate that is applied to the volume measure for incentive purpose. Quota rates differ from commission rates in the following way: A quota rate is determined by target amount/quota. The rate is expressed as $300 per percent attainment. Each point of attainment (volume of the measure/quota) is multiplied by the quota rate to calculate incentive earnings. It is usually used for large dollar volume measures where a commission rate would be too small.
Ramped Rate
A ramped rate is a rate that changes with volume attainment for the measure.
Recovery
Removing the commission or bonus earned caused by cancellation of an order, return of a product, split of a sale, clerical error or other conditions.
Revenue
Amount of money the company earns on a sale. Revenue often differs from bookings depending on GAAP (generally accepted accounting principals) compliance.
Rolling Period
A rolling period is a time frame of the current period and a specific number of prior periods.
Salary/Incentive Mix
The Salary/Incentive Mix is the portion of salary and target incentive to the total target compensation at 100% attainment of all goals.
Sales Alignment
Alignment refers to the extent that a sales compensation program is aligned with the key business objectives of the company. It also refers to the extent that sales compensation plans for different job roles are aligned to motivate teamwork across sales roles.
Sales Assignment
In order to ensure that a customer is not inundated with multiple reps calling from the same company, it is typical to assign prospects to a person in a sales role. Often an assignment is referred to as a "territory" and can be based on an account id, name, channel, area code, zip code, product, team, roll up, etc. Assignments are usually made at a position level so if an individual moves out of the position, the assignment stays with the position and does not move with the individual.
Sales Crediting
The process in which you determine which participant receives credit for the sales event and how much will count. For companies with complex selling processes it is best practice to credit multiple positions to encourage team work and avoid channel conflict.
Sales Excellence
Individual sales performance that is in the top percentile of all individuals whose performance is being measured. The top percentile is determined by the company but it is usually 100 -120%.
Sales Incentive Leverage
The relationship of the elements in the compensation plan expressed as a percent. It may be salary and incentive relative to Target Total Compensation or commission and bonus relative to Target Incentive Compensation. This is also known as leverage.
Sales Incentive Mix
The relationship of the elements in the compensation plan expressed as a percent. It may be salary and incentive relative to Target Total Compensation or commission and bonus relative to Target Incentive Compensation. This is also known as incentive mix.
Sales Territory
See assignment - A territory can be account, customer, geographic, products, etc.
Shipment Date
Shipment date is the date the order was shipped by the company or channel partner.
SPIFF aka SPIF
SPIFF is a Special Performance Incentive for Field Focus or Special Product Incentive Fund. An added incentive amount for selling certain items such as overstock, out-of-season, or obsolete.
Split Claim
If responsibility is shared between two or more Participants on a specific sale, sales credit may be splits.
Target Total Compensation (TTC)
TTC is the expected total compensation including salary, commission and bonus at 100% attainment of all goals.
Target Incentive Compensation (TIC)
TIC is the expected total incentive compensation for commission and bonus at 100% attainment of all measures or goals.
Territory
See assignment - A territory can be account, customer, geographic, products, etc.
Threshold
A threshold is the performance level required before incentives will be paid out.
Upside
Upside is the earning potential when all goals have exceeded the plan (100%) attainment amount. Plans that have a great deal of upside are considered to be highly leveraged.
Weight
Weight is used to refer to the relative importance of a measure or factor used to determine a credit or payment amount.
Windfall
A windfall is an unusually large sale creating exceptional earning for a participant.