What’s a variable compensation policy and when do you need one?
You may wish to put in place this policy if you're planning to offer one or more employees in your business a commission-based compensation plan comprising both a base-level salary (usually guaranteed) that are supplemented by commission payments that may vary depending on the employee(s)’ performance.
It’s most often used for sales and business development roles.
This is a variable compensation policy against which any subsequent variable compensation plan (VCP) should be read, since the two will need to go hand in hand.
While you typically put in place an employee variable compensation policy once and then you may evolve it over time, you should expect to be creating individually tailored employee VCPs each sales performance period (typically each financial year, tied into when you’ll be setting the new financial and sales targets for your business).
Our policy is drafted to recognise commission paid for achieving actual, banked, sales revenue into the business.
And the supporting VCP is drafted to support commissions paid to the employee each quarter by reference to the revenues that the business has received during that most recent quarter.
This is a great model for early-stage businesses where the employee’s commission should be 100% aligned with the business’ primary goals of revenue and cash collection, (commission payments held back until invoices are paid is key).
If you prefer, you can adapt the arrangements to base your version of this policy and the supporting VCP on other structures that are more evolved. These structures might be, for example:
• VC paid quarterly on annual revenues, (meaning one flat commission rate over a whole year)
• VC paid monthly on invoiced sales bookings (money contractually committed by a customer but not yet received into the company bank account)
• VC paid monthly on sales bookings (very common in more established businesses but often much more complex to model and administer)
If you wish to adopt one of these alternative compensation methods, you’ll need carefully to adapt the text of this plan to clarify this.
Our experts recommend that you don't give this policy contractual status in any employment contract that you put in place but that you do reference it in that contract, make clear that the employee is expected to comply with the policy and that you have the right to update or revise it, in your discretion and when you want to.