New Law for Salesperson Commissions

California recently passed a law governing commission contracts with employees.  The new law (AB 1369) requires that companies

  • Define their commission plan in writing
  • Provide a signed contract to covered employees
  • Obtain a signed receipt of contract from those employees

Beyond legal compliance, now is a good time for companies to revisit commission processing in their accounting software.

MBSG provides expert systems consultants to streamline operations and workflow -- in the office, in the warehouse, and on the shop floor.

Here are four tips for smarter commission polices and processing

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Tip 1:  Use your system to enforce sales and commission policies.

If your salespersons have leeway to negotiate pricing, does your system

  • Tell salespersons the minimum price to accept for each item?
  • Warn or prevent taking an order below minimum price?
  • Alert Management to orders in the system below minimum price -- before the order ships?
  • Prevent unapproved orders from shipping?
  • Prevent paying commission on orders below minimum price?

If you are paying commission on orders that do not meet minimum price targets, this is a good time to rethink your policies. Also, to ensure that your systems enforce those policies.

Tip 2:  Rethink where you are paying commission and why.

Example:  Commonly, we find companies paying outside sales persons based on total sales in a territory, rather than total new sales - new customers, new product lines, new items. Do your commission policies incent the salesperson behavior you want?

Of course, companies need to take good care of customers and retain them.

Example: In many businesses, it is the inside staff who most influence customer retention and satisfaction.  Smart companies pay commission dollars (and other incentives) where they will have the biggest impact on desired outcomes.

Example: In some business, the sales challenge is not to win the initial order. Rather, to win the repeat or restocking order.

Do your policies measure and incent the outcomes you want?

Tip 3:     Process Deductions and Exceptions through routine software operations--not after-the-fact in Excel.

Example:  Assume you have a policy of charging back salespersons for commission paid on invoices that become uncollectable at a subsequent date.

A common approach is to export your invoice detail to Excel, create a commission statement, and process the exception in Excel. Although this approach is workable for infrequent exceptions, there are drawbacks. Among others, you create a commission statement in Excel that does not match records in your accounting software. Given the new laws regarding commission payments, this might increase your risk of noncompliance exposure.

Tip 4: If your business strategy truly requires complex commission calculations, then purchase 'plug-in' software with rules-based flexibility.

With rules-based software, you can calculate commission based on any set of rules that will generate more business.  Examples include:

  • For shipments to Sears locations open at least 6 months, pay 2% bonus commission for Product Line:  Fancy Label Towels

    Purpose: Do not pay bonus commission on initial-stock orders sold  to recently-opened stores.
  • For Product Line:  Political Bobble Heads, pay 15 % bonus commission on items sold from stock This Period --- provided that there were no sales of that item in the prior three months.

    Purpose: Move slow moving items-- before they become obsolete.
  • For these three product lines:  Happy Face Stationary, Happy Face Towels, and Happy Face Clocks

    10% commission for GP  under $10,000
    12% commission for GP   $10,000 to $ 50,000
    13% commission for GP $50,000 and above

    Provided that each product line has at least $5,000 in GP. Otherwise, pay only 10% on all three product lines.

    Purpose: Incent a broader product mix, not just the 'most popular' items.
  • Pay 1% override to the Territory Manager-- except for sales to Wal-Mart in that territory

You get the idea. When you need complex commissions, use the right tool. Nothing beats rules-based commission software for flexibility and maintainability.


With the new law governing commission documentation, this is a good time to review commission polices, reporting, and workflow. For legal analysis of AB 1369 by Landegger, Baron, Lavenant & Ingber employment law experts, click on the following link.

MBSG provides expert systems consultants to streamline operations and workflow -- in the office, in the warehouse, and on the shop floor.

MBSG helps clients deploy and use MAS90, MAS200, MAS500, QuickBooks, Peachtree, Fishbowl Inventory and other software to manage Inventory, Accounting, ERP, and Manufacturing.

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