Tiered commission
Tiered commission pays different rates in different bands of production, with the rate rising as a salesperson sells more. The design choice that decides everything is whether tiers are marginal, so each band pays its own rate on the dollars inside it, or retroactive, so reaching a band reprices everything sold in the period at the higher rate.
Most plan documents contain the word tiered and omit the word that decides what tiered pays. Marginal or retroactive is the choice. On ordinary production it is worth five figures a year to one rep, and it is left unstated often enough that it should be the first thing anyone checks in a plan they are being asked to sign.
Marginal tiers treat each band on its own. Dollars inside the first band earn the first rate, dollars inside the second band earn the second, and crossing a threshold changes nothing about the money already booked. Retroactive tiers work differently: reaching a band reprices the entire period at that band's rate, including every dollar sold weeks earlier. Both are legitimate designs with a long history. They produce wildly different numbers and wildly different behaviour in the last week of a period.
Retroactive tiers make the marginal dollar behave strangely. Under the bands in the example below, a rep sitting exactly on $300,000 has earned $18,000. One more dollar of revenue takes them to $27,000. Nine thousand dollars turns on a single dollar of sales, which is not a metaphor for motivation, it is the actual arithmetic the rep is doing on the last Thursday of the quarter. Reps at a retroactive threshold will discount aggressively to get a deal over the line, split an order to land the part that fits, or lean hard on a customer who was not ready. A plan that puts $9,000 on one dollar should expect all three.
The second unstated choice is the reset. Tiers that reset quarterly let a rep reach the top band four times on production that would only reach it once on an annual cumulative basis, which is a substantially more expensive plan wearing the same rate card. Quarterly resets also shift deals across period boundaries, because a deal that would land in the low band of a fresh quarter is worth more in the top band of the one that is closing. Whichever you choose, the reset period belongs in the same sentence as the rates rather than three pages away in a definitions section.
The same $320,000, paid two ways
The plan pays 4% on the first $200,000, 6% from $200,001 to $300,000, and 9% above $300,000. A rep finishes the period at $320,000. The plan document says tiered and does not say which kind.
- Marginal: first $200,000 at 4%
- $8,000
- Marginal: next $100,000 at 6%
- $6,000
- Marginal: final $20,000 at 9%
- $1,800
- Retroactive: all $320,000 at 9%
- $28,800
- Marginal total against retroactive total
- $15,800 against $28,800
A $13,000 difference on identical performance, decided by one word. The cliff is sharper still just below the threshold: on retroactive tiers a rep at $300,000 earns $18,000 and a rep at $300,001 earns $27,000, so the last dollar of the quarter is worth $9,000 to them.
Retroactive plans cost far more than the model predicted
Retroactive spend is convex and it arrives all at once. A finance model that prices the plan at average attainment underestimates it badly, because the reps who cross a threshold are repriced on their whole period and they tend to cross in the same final fortnight. A quarter where eight reps land just over the top band costs dramatically more than a quarter where the same total revenue is spread with four reps just under it. Model a retroactive plan against a distribution of outcomes rather than an average, and check what happens in the good quarter rather than the median one, because the good quarter is where the cash requirement lands.
- What is the difference between marginal and retroactive tiers?
- Marginal tiers pay each band's rate only on the dollars falling inside that band, so a rep crossing into a higher tier earns more on the new dollars alone. Retroactive tiers apply the highest rate reached to everything sold in the period, repricing earlier sales at the new rate. On tiers of 4%, 6% and 9% across $320,000 of production, marginal pays $15,800 and retroactive pays $28,800.
- Do commission tiers reset each quarter?
- It depends on the plan, and the answer changes the cost substantially. Quarterly resets start each rep at the bottom band four times a year, letting a consistent performer reach high tiers repeatedly. Annual cumulative tiers count production from January onward, so the top band is reached once and held. A plan should state its reset period explicitly alongside the rates.
Nearby terms
The long form lives in the guides: How to calculate commission.
Knowing the word is
the easy half
Commish pays tiered commission the way your plan describes it, shows the arithmetic on every line, and traces each payment back to the deal that earned it.