Dear Workforce: What Is Standard Practice for Paying Out Commissions to Terminated Salespeople?

Q: What should we do when a salesperson is terminated involuntarily or the company is sold/acquired? Is there a standard practice regarding how commission is paid? We have salespeople who earn two kinds of commission: one on the sale of products and services, and another for subscription services billed monthly. What should we do when a salesperson is terminated involuntarily or the company is sold/acquired? Is there a standard practice regarding how commission is paid?

— New Start in Sales, controller, software/systems, Costa Mesa, California

Dear New Start:

This is an area where the maxim “you get what you pay for” truly applies. Your sales-incentive program should directly and effectively support business goals and sales strategy. Design the plan so it is easy to understand. Communicating with the sales force about the intent and operation of the plan also proves a great help.
Your plan should detail the administrative rules on how payments get distributed. However, if you do not have a plan document, here are some questions to research before deciding how to proceed.

• What has the company’s practice been? This doesn’t necessarily govern your decision, but you may find upon examination that sales administration or payroll does things that the human resources folks are unaware of.
• How do competitors handle this? Ask your counterparts in companies against which you compete for sales and labor.
• If an employee leaves, when does another salesperson take over the customer accounts? This is probably the most important question, as you will not want to pay a double commission, nor will salespeople be willing to work on accounts for which they receive no pay.
• What can your company afford?

In our experience, most companies do not pay commissions to employees who are involuntarily terminated unless there are extenuating circumstances (reduction in force, significant number of layoffs, job eliminations, etc.). Certainly, when employees are let go because of poor performance or incompetence, incentives stop immediately. Remaining monthly commissions are transferred to the employee who assumes responsibility for managing those accounts for the duration of the contract.
The terminated employee may be paid commissions earned for the month of termination and not beyond. Plans that we design specify that an employee must be active and on payroll at the end of each performance period (in some cases a pro-rated amount is provided for partial periods). If the employee leaves voluntarily, he or she typically forfeits the right to additional monthly commission.
Acquisitions or changes in control of the company do not have an immediate impact on sales compensation or commission payments. However, the change enables new management to examine whether existing compensation systems meet corporate goals. It also offers a chance to change previous incentive programs if they don’t live up to expectations.
One final note: consult an attorney about state wage and hour laws that apply to you. Legal expertise also can help ensure that you are complying with federal and state FLSA regulations, particularly those that apply to inside sales reps.
SOURCE: Bob Fulton, managing director,The Chatfield Group, Glenview, Illinois, Sept. 15, 2004.
LEARN MORE: Termination Checklist
The information contained in this article is intended to provide useful information on the topic covered, but should not be construed as legal advice or a legal opinion. Also remember that state laws may differ from the federal law.