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Compensation Calculations (Factors, Benefits, and Tools)

Compensation calculations help organizations create a compensation structure for different roles and levels in an organization. Often compensation is linked to salary, however, salary is a salesperson’s wage and compensation is a comprehensive view of all the benefits provided by the company. It depends on factors like industry, years of experience, location, skillset, and supply and demand. Calculating compensation offers benefits such as increased transparency, efficiency, and accuracy. Read on to learn more about calculating compensation both manually and using online tools.


Salary ≠ Total sales compensation

If I were to define it, sales compensation is the sum of salary, benefits, and other incentives a salesperson might receive when they join an organization.

Incentives can range from free coffee coupons and paid time off to health insurance coverage and development allowances.

So, why are compensation calculations important?

Let’s find out!

In this article, I’ll cover the five key factors that affect compensation calculations, the benefits of calculating compensation, and also methods and tools for calculating sales compensation.

5 Key Factors That Affect Compensation Calculations

Let’s take a look at various factors that shape sales compensation:

Industry

Salespeople with the same level of experience can earn different compensation packages depending on the industry they work in.

For example, a person working as an entry-level sales representative at a manufacturing company will be compensated less than a person working as an entry-level sales representative at an IT company.

Moreover, the compensation packages depend on:

  • Company revenue.
  • Size of the industry, and its demand.
  • Worker unions and their baselines.

These factors also help determine if the job is more labor-oriented or knowledge-based.

Years of Experience

Another metric that is crucial to compensation is the years of experience. The more education and work experience the candidate has, the more they’re compensated.

For example, if you’re looking to hire a sales representative with 5 years of experience in catering to enterprise leads. Then you need to pay them better with a more competitive and comprehensive package

Location

Compensation packages even if in the same industry and with the same years of experience vary vastly with the location.

For instance, an employee with five years of experience in New York City might be getting more than five times the sales rep with the same years of experience in North Carolina.

But remember, location-dependent compensations should adhere to state or country laws. It should also be in line with the employee benchmark metrics set by the respective place.  

Skillset

Different jobs require different skill sets.

Skill sets can also vary depending on the size of the company.

For example, an established organization might need a sales representative who has 5 years of SDR experience. On the other hand, an agile company or startup will look for a representative who has experience across the board.

Additionally, in these cases, compensations can differ in accordance with the requirements.

Supply and Demand

Lastly, compensations also depend on the talent density for a particular role or even the availability of the role in that location.

Moreover, at times supply and demand for a particular role can outweigh the years of experience or skill set. In these cases, you not only have to pay a lump sum but also give an attractive package to make them stay.

3 Amazing Benefits of Compensation Calculations

Calculating total compensation streamlines collaboration, improves employee engagement, and more.

Here are the top three advantages of calculating sales compensation:

Drives Transparency

At GitLab, team members and candidates in the pipeline have access to the compensation calculator that helps them learn how it varies according to the levels, roles, and locations.

This means that instead of blindly negotiating on a number of perks, candidates can now ask for the benefits that pertain to the roles.

Access to compensation calculations also helps new as well as old salespeople in the pipeline design their career graphs and determine the move.

It shows them what are the benefits of the next band and why they should upskill themselves. This culture of transparency drives the culture of loyalty to the brand and lesser attrition.

This also helps them look at their peers as equals without fostering confusion or jealousy.

More importantly, as an organization, it helps your finance teams heave a sigh of relief and streamline salaries, instead of paying one person more than the other.

Improves Efficiency

Having fixed compensation packages allows you to remove candidates with higher salary expectations from the hiring process early on – saving valuable effort.

It also eliminates back-and-forth conversations between recruiters, managers, and candidates, and saves time for approval on various packages.

Additionally, if an existing salesperson is demanding more due to location change or other reasons, you can decline their requests instead of trying to make it work!

Increases Accuracy

For organizations, having compensation calculations helps calculate and streamline the hiring budgets.

Instead of randomly compensating people based on what they ask, it is easier to forecast the growth and budgets needed with the help of a streamlined compensation package.

Transparent compensation calculations shift a salesperson’s narrative from “I want an X% increase” to "what can I do more to upskill myself to reach the next tier and improve performance”.

This allows your salesforce to focus on output and growth rather than simply negotiating money.

How to Perform Compensation Calculations

Having proper compensation structures is essential and can make things easier.

However, a lot of companies don’t use them. This is mostly due to the calculations involved and the complexity of coming up with structures.

But don’t worry!

Let’s see how you can do quick calculations both manually and with online compensation calculators:

Calculate Manually

Here’s a step-by-step method on how you can arrive at a number

Step 1: Calculate the base salary

Base salary is the annual salary which is divided by pay periods.

For example, if your employee receives $40,000 annually and you pay them monthly, then you need to divide $40,000 by 12.

This results in $3,333.3 as the base salary.

Additionally, if you have a commission component, then it should also be factored into the base pay calculations – depending on the role, location, industry, etc.

Step 2: Calculate the paid leave.

To calculate paid leave, you need to multiply the number of paid leaves by the daily earnings  of the person.

For example, if you have 20 days of paid leave, your daily wage is 109.5 ($40,000/365).

Next you need to multiply it by the number of paid leaves which is 20*109.5 = $2190.

Step 3: Factor in insurance

The next is to calculate the total insurance provided to the employee and pension components that are added to the employee’s total compensation like 401(K).

You need to calculate it according to the employee’s pay period.

Moreover, if you have additional benefits like gas for vehicles, cell phone bills, and food allowances, you should also counter them into your calculation by the pay period.

Step 4: Include other bonuses

After calculating the perks, you should also account for ESOPs, RSUs, profit sharing, scheduled bonuses, etc, and divide it by your pay period.

Step 5: Perform final calculations

Once all these factors are accounted for you can communicate to your employee that they would be receiving:

  • A salary of $40,000 (base pay)
  • PTO worth $2190
  • RSUs/ESOPs/Profit sharing + insurance cost + bonuses/commissions + allowances etc.,

Adding all these can make a more appealing number.

Use a Compensation Calculator

Now that you know how to calculate manually you can also do it online. It makes life very easy and saves time and money, which otherwise you would’ve spent on buying software.

Here are two online calculators you can use for your compensation calculations

A. Gitlab Calculator

Gitlab calculator is based on a simple formula.

It is optimized to calculate compensations for 200+ regions around the world, based on the formula that people with the same attributes should earn similarly. It is also adjusted to the local currency and provides the closest competitive rate possible.

Note: You need a Gitlab account to use this calculator.

B. CalcXML

CalcXML is a free-to-use calculator that is based on attributes like

  • Paid time off
  • Insurance benefits,
  • Annual retirement benefits,
  • Government benefits, and other fringe benefits.

This calculation helps you analyze the financial needs required to hire an employee.

Wrapping Up

Creating role-based compensation packages will protect your salespeople and company against unwanted economic downturns.

That’s why it’s important to understand the factors to come up with an effective compensation plan.

Compensation calculation inculcates a culture of transparency and streamlines collaboration. It also shows that you care about your salesforce’s success and are willing to reward them as they scale.

Use the methods shown above to pick what suits your team the best!

Make payouts right every time with ElevateHQ

Move from manual to automated and error-free commission calculations with our platform.

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