How tiered commission works
Most commission plans don't pay one flat rate. They pay different rates depending on how far you are toward quota. The bands are called tiers. Tiers above 100% of quota that pay more are accelerators. Tiers below a threshold that pay less are decelerators.
Two plans can have the exact same tier table and still pay very different amounts. It all depends on one detail in the plan document: are the tiers marginal or retroactive?
Marginal tiers (like tax brackets)
Each dollar earns the rate of the tier it falls in. Your first dollars are paid at tier 1, the next band at tier 2, and so on. Crossing into a new tier only raises the rate on the dollars above the line. This is the most common setup, and it's what this calculator uses by default.
Retroactive tiers
Once you reach a tier, every dollar for the period is paid at that tier's rate, including the dollars you closed earlier. That makes crossing a tier line a big event: one deal can re-price your whole period.
Worked example
Say your annual quota is $600,000 and you've closed $690,000 (115% of quota). Your tiers are 5% up to 50% of quota, 8% from 50–100%, 12% from 100–150%, and 15% above 150%.
| Tier | Sales in tier | Rate | Commission |
|---|---|---|---|
| 0–50% ($0–$300k) | $300,000 | 5% | $15,000 |
| 50–100% ($300k–$600k) | $300,000 | 8% | $24,000 |
| 100–150% ($600k–$900k) | $90,000 | 12% | $10,800 |
| Marginal total | $690,000 | 7.2% effective | $49,800 |
On a retroactive plan the same $690,000 would all be paid at 12%: $82,800. That's $33,000 more for the same sales. So it's worth knowing which kind of plan you're on.
How to read your comp plan
- Look for the words. "Incremental", "marginal" or "applies to bookings within the tier" usually means marginal. "Retroactive", "all bookings paid at the attained rate" or "rate applies from dollar one" means retroactive.
- Check the quota period. Tiers can reset monthly, quarterly or annually. A monthly reset makes it harder to stay in accelerators. Enter the quota and sales for the same period.
- Know what counts as credited sales. Bookings, first-year ACV, TCV, gross margin and collected revenue are all different numbers. Use whatever your plan pays on.
- Watch for caps, draws and clawbacks. A cap limits the top tier. A draw is an advance against future commission. A clawback takes commission back if a customer cancels or doesn't pay. Enter a clawback as negative sales to see the effect.
Use it to check your commission statement
Comp math goes wrong more often than people think. A deal gets credited to the wrong month, a split gets missed, or a rate change isn't applied. Run your credited sales for the period through this calculator. If the number is clearly different from your statement, go back to the deal list and ask about specific deals. "Can you walk me through how deal X was credited?" gets a much better response than "I think my check is wrong."
FAQ
What is the difference between marginal and retroactive commission tiers?
With marginal tiers each dollar earns the rate of the tier it falls in, like income tax brackets. With retroactive tiers, once you reach a tier every dollar for the period is paid at that tier's rate, including earlier sales. Retroactive plans pay much more right after you cross a tier line.
What is a commission accelerator?
An accelerator is a higher commission rate that kicks in once you pass a threshold, usually 100% of quota. It rewards overperformance. For example, 8% up to quota and 12% on everything above quota.
How do I calculate my base commission rate from OTE?
A common way to set a base commission rate is target variable pay ÷ quota. If your target variable is $60,000 and your quota is $600,000, your base rate is 10%. Then accelerators and decelerators move it up or down around quota.
Does this work for monthly or quarterly quotas?
Yes. Enter the quota and the credited sales for the same period, monthly, quarterly or annual, and the tiers will apply to that period.
Is commission taxed at a higher rate?
Commission isn't taxed at a special rate, but it's often withheld differently. In the US, employers can withhold federal tax on supplemental wages like commission at a flat rate (22% for most people), plus Social Security and Medicare. The real tax is settled when you file. See IRS Publication 15 or ask a tax professional.