Commissioned sales people often earn decidedly different levels of pay throughout their careers. Within a single year, a commissioned salesperson may swing widely in her monthly earnings depending on how quickly large accounts come through, seasonal variances and her own level of enthusiasm. When you lay off salaried employees, it's easy to calculate a severance package, but for commissioned employees, you need to consider a variety of issues and devise a fair formula.
1. Determine eligibility for severance pay using the same requirements that you use for salaried employees. You can include the rules in your company policy manual that might require one year of continuous service, for example. Your eligibility for severance pay may rely on the employee not turning down a transfer or other appointment.
2. Pay severance pay only to full-time employees, which you can determine through their tax status. Employees receive benefits and a W-2 form that reflects employer tax deductions. A subcontractor, on the other hand, receives a 1099 for annual earnings.
3. Use the salesperson's annual pay from the previous year to determine an average weekly or monthly earning. Add up all earnings for the year and divide the figure by 12. If your severance package provides a 90-day payout, provide the salesperson with three months of pay based on his average annual earnings.
4. Base the severance pay on the most successful months of the salesperson. Particularly in capital equipment sales or other large commission items, a salesperson may work for months with one client to close the deal. A fair severance takes that into consideration and doesn't punish the salesperson for not earning the same amounts every month.
5. Create a flat severance based on a pre-determined figure gleaned from industry averages. For example, according to the U.S. Bureau of Labor Statistics, a computer system design sales representative earns an average of $80,600 per year. If you provide a six-month severance based on industry averages, you'd provide the employee with $40,300 upon leaving under certain predetermined circumstances.
- Paying employees severance pay when you must reduce your workforce is not a legal requirement. Typically it's a perk that's written into the hiring contract or enforced through your company's general policy manual governing your staff.
- You may have to rely simply on the draw you paid the salesperson in the previous year if her paid commissions did not exceed the guaranteed weekly or hourly pay. Consider all the ramifications when you create your severance policy. For example, you may fire a salesperson who consistently under-performs and end up paying them to leave. Since severance pay is not mandatory, consider all the potential scenarios when devising your policy or when you bring on a new salesperson. Agree to the terms of severance before the salesperson starts working for you. You might for example, agree to pay severance only when a commissioned salesperson routinely earns above a certain dollar amount or repeatedly covers the draw.
Items you will need
- Eligibility policy
- One year's earning statement
- Best month earnings statement
- Industry averages
- Severance policy
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