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When commission is paid on contract value alone, a company can reward a discounted deal, a long credit term, avoidable rework or an invoice that is never collected. A better design does not postpone every reward until year-end. It divides earning points among a valid contract, accepted delivery and collected cash, then calculates the base from a contribution measure the salesperson can understand and audit.
This is an incentive-design framework, not accounting or legal advice. IFRS 15 links reported revenue to contractual performance obligations and consideration the entity expects to be entitled to, including estimates of variable consideration. That does not mean IFRS 15 prescribes the commission plan below. It means management should not treat a signed order, recognized revenue and collected cash as the same event. Employment terms, accounting treatment and local rules require qualified review.
Decide which behavior the incentive is buying
Start with five possible outcomes: new volume, contribution margin, faster collection, retention or a strategic product mix. Do not give all five equal weight. Select one primary result and two guardrails that prevent harmful behavior. For example, collected contribution can be the result, while an approved price floor and credit term act as guardrails.
This uses the output of a deal-margin waterfall without duplicating that analysis. It can incorporate account cost-to-serve when exceptions are substantial, and payment-term cost when salespeople can extend customer credit.
Choose a base that cannot improve only on paper
Three bases are useful for internal design: contracted revenue, revenue recognized under company policy and collected contribution. Contract value is fast but ignores fulfilment and cash. Recognized revenue is closer to reporting but may still miss collection quality. Collected contribution deducts defined direct delivery cost, discounts, credit cost and approved exceptions, then limits the commissionable amount to cash actually received.
Do not charge a salesperson for costs outside their control. Rework caused by an internal operations failure should remain visible but should not automatically reduce commission. An unapproved discount or expedited promise made during negotiation belongs in the incentive base. Give every deduction one definition, a data source and an appeal owner.
A hypothetical case: one contract, two commissions
Assume a QAR 500,000 service contract. The old plan pays 4% at signature, or QAR 20,000. The business ultimately collects QAR 470,000 after a QAR 30,000 settlement discount. Direct delivery cost is QAR 360,000, and rework caused by an unapproved commercial promise costs QAR 25,000. Collected contribution is therefore QAR 85,000.
An alternative pays 12% of collected contribution: QAR 85,000 × 12% = QAR 10,200. Twenty percent is earned when the signed contract passes price and credit checks, 30% upon accepted delivery and 50% on collection. The three payments are QAR 2,040, QAR 3,060 and QAR 5,100. Every figure is hypothetical, not a market compensation benchmark or data attributed to Fahad ALNaimi or any company.
The example does not prove that 12% is the right rate. Back-test the plan on the last twenty comparable deals. If a capable seller’s expected income falls despite unchanged objectives, adjust the rate or threshold. The purpose is to relocate reward toward deal quality, not impose an undisclosed pay cut.
Use three earning gates instead of a surprise clawback
- Contract gate: identified customer, executable scope, approved price and approved credit term.
- Delivery gate: documented acceptance and no undisclosed commercial exception.
- Collection gate: the final portion follows cash received, with a defined cut-off date.
Gates reduce the need to recover a large payment after it has been made. If a cancellation or refund occurs, apply a limited, written adjustment to future earnings rather than an unexplained deduction. Resolve disputes within a fixed period and distinguish a sales error from an operations failure or customer default.
Measure the plan before expanding it
Track average discount, collected contribution by seller, days to pay, exception rate, adjustment value and earnings distribution across the team. Add salesperson attrition and forecast quality. A plan that improves margin while making earnings impossible to predict can lose the people the company wanted to motivate.
Run the new plan in shadow mode for two months. Calculate it without changing pay and show each salesperson what would move and why. Repair missing data and ambiguous rules before activation. Do not compare raw margins across fundamentally different portfolios; segment by product, customer type and deal size.
Where margin-linked commission fails
It fails when deal cost is unreliable, changes months later without a cut-off, or is dominated by operations decisions the seller cannot influence. It also fails for multi-year contracts when all value is forced into one period. Holding every commission payment until collection can be equally damaging in long-credit markets because it makes employees finance the company without choosing to do so.
The operating decision is direct: define the contribution a seller can influence, pay an early portion for a valid contract, and tie the balance to delivery and collection. Back-test the rules and run them in shadow mode. Do not activate the plan until every salesperson can reproduce the calculation from the same record.
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