SALES COMMISSIONS

REVIEW AUDIT REPORT

TABLE OF CONTENTS

03 Executive Summary
Executive Summary
Objectives, Scope & Procedures Performed

06 Background
General Background
Commission Payment Statistics
Commission Processing Statistics
Benchmarking Information

11 Issues and Observations

Issues & Observations Summary
Detailed Issues & Observations

21 Appendices
Appendix A: Leading Practices Scorecard
Appendix B: Leading Practices Detail
Appendix C: Process Flowchart
Appendix D: Testing Matrix
Appendix E: Acknowledgements

2
EXECUTIVE SUMMARY
Internal audit reviewed the (Location) commissions process at Company X corporate headquarters in (Month) (Year).
The objective of this review was to obtain an understanding of the commissions processes, evaluate the adequacy
and effectiveness of the associated internal controls, and to identify opportunities for process improvements.
Key controls are adequate and operating on a consistent basis. Existing controls need to be enhanced and other
controls added to help the processes operate more effectively and efficiently. Several opportunities for internal control
and process improvements have been identified through interviews, observations and limited transaction testing. The
following summarizes the issues noted during the review, and categorized as relating to the commissions plan or the
process:

The Commissions Plan

Company X’s commission plan has not been designed and is not administered in ways
Plan Administration to achieve efficient implementation. As a result, implementation is highly manual,
inefficient and costly to Company X. Highlights are as follows:
• The plan is highly customized and there are frequent, ad-hoc changes.
• Mega-deal provisions are subjective and judgmental.
• Management makes many decisions to pay commissions differently than indicated
by the bookings data in the system.
• Communication of changes to plan parameters is not done timely and effectively.

The Commissions Process

Integrity of Bookings Bookings data in the system is often incomplete and/or erroneous. Many manual
Data adjustments are required to pay commissions properly. Highlights are as follows:
• Sales representatives’ geographical splits are often incorrect.
• A large proportion of orders are booked on the last day of the quarter, increasing the
likelihood of errors.

3
EXECUTIVE SUMMARY

The Commissions Process (Continued)

Commissions Opportunities exist to improve controls and procedures with the commissions
Department department. Highlights are as follows:
• Performance metrics are not used to improve efficiency and effectiveness.
• Documented policies and procedures do not exist.

Commission Company X’s cost to calculate and pay commissions is XX times the benchmarked
Processing Costs average (see p. 10).

See the Issues and Observations Summary and the Detailed Issues & Observations sections of this report (pages
11-19) for a detailed discussion of all issues identified in this review and the management implementation plan to
address each issue.

4
OBJECTIVES, SCOPE & PROCEDURES PERFORMED

Objectives Scope
• Understand and evaluate the process efficiency, • The (Location) sales commissions payment
data reliability and internal controls for process utilized for Company X’s FYXX Plan.
commissions calculations and payments. • The review included detail testing of Q1 and Q2
• Determine that company policies and procedures FYXX sales commissions.
are followed.
• Compare Company X’s practices to “Leading
Practices.”
• Make recommendations that will result in a strong
system of internal controls and financial cycle
process improvements.

Summary of Procedures Performed

• Interviewed key management and personnel responsible for the sales commissions process.
• Reviewed relevant company policies and procedures.
• Evaluated the effectiveness and efficiency of business processes against “Leading Practices.”
• Benchmarked Company X commissions operations against selected other companies.
• Performed limited transaction testing of Q1 and Q2 FYXX sales commissions payments.

5
GENERAL BACKGROUND

General

Executive sales management establishes and approves sales compensation plans for all commissionable
employees with assistance from human resources. Plans are revised on an as needed basis. The structure of
the (Location) sales commissions plans includes a base salary and quota commissions. Executive sales
management establishes quotas, taking into consideration factors such as territory, customer and sales
representative history.
Quotas are based upon XX% on bookings. Commissions paid on orders subsequently de-booked are
deducted from employees’ future commissions. For uncollectible receivables, Company X determines
commissions implications on a case-by-case basis. Once sales quotas have been reached, over-
achievements are paid at higher rates than commission rates in goal letters. In addition, bookings exceeding
$XXX are termed “Mega-Deals” and are commissioned uniquely and individually by sales management.
Orders are entered into SAP and uploaded into TrueComp. TrueComp calculates commissions according to
commission rates and monthly bookings. Commissions payment data is downloaded from TrueComp into
Excel and uploaded into ProBusiness, the payroll system.

Personnel

The Company X sales commissions calculation process is performed by the commissions manager and X
commissions analysts. There were approximately XX commissionable employees (including XX sales
representatives) at the end of (Month) (Year).

6
COMMISSION PAYMENT STATISTICS

Commissions Paid, Budget vs. Actual: Q1 & Q2

$XX X% Over Budget

X% Over Budget
$XX Budget
Actual

$XX
Q1 Q2
Total Q1/Q2 Commissions Paid: $XXX

Commissions as a % of Bookings
X% X%

X%
X%

X% X%

X%
April May June July

7
PROCESSING STATISTICS

Process Information Manual Adjustments to Commissions Calculations, Q1 & Q2 20XX

XX XXX total errors, XXX average per month

X
Manual Adjustments result when changes from
previously paid periods need to be reflected on
commissions payments yet to be made. See Issue
X
#3. X
XX
Booking Errors result when incomplete X
commissions data is entered at the time of booking. X
X
As a result, Commissions Analysts must investigate
errors and complete information prior to payout of
commissions. XX
Jan Feb Mar Apr May June

Booking Errors, March to July 20XX Breakdown of Bookings Errors by Processor

XXX total errors, XXX average per month Processor Count % of total count Value
XX X 1 XXX X% $ XXX
X
2 XXX X% $ XXX
X
X 3 XXX X% $ XXX

XX 4 XXX X% $ XXX
X
5 XXX X% $ XXX
6 XXX X% $ XXX
Others XXX X% $ XXX
XX Totals XXX 100% $ XXX
Mar Apr May June July

8
BENCHMARKING INFORMATION
The matrices found on the following pages illustrate the comparison of Company X’s commissions department metrics
to data collected from other companies which utilize commission accounting within their operations. While
management decisions should not be based on this data, it does provide a high-level view of what other companies
are doing within their commission calculation function.

General Information
Total Company Revenue (Domestic) $XX $XX $XX $XX $XX
Last Fiscal Year’s Variable Compensation Expense (Locations) $XX $XX $XX $XX $XX
Variable Compensation as a Percentage of Revenue (Locations) X% X% X% X% X%
Number of Commissions Departments Worldwide XX XX XX XX XX
Total FTEs Dedicated to Processing Variable Compensation Calculations
XX XX XX XX XX
and Payments (Company A includes [Location] only)
Commissions Expense per Commissions Department FTE $XX $XX $XX $XX $XX
Commission Payments Based Upon:
X% X% X% X% X%
Bookings:
X% X% X% X% X%
Billings:
X% X% X% X% X%
Product Acceptance:
X% X% X% X% X%
Sell Through:
X% X% X% X% X%
Payments:
X% X% X% X% X%
Shipping:
Monthly/ Monthly/ Monthly/ Monthly/ Monthly/
Frequency of Variable Compensation Payment
Quarterly Quarterly Quarterly Quarterly Quarterly
Access/ Access/ Access/ Access/ Access/
System/Application Used to Calculate Variable Compensation Payments
Excel Excel Excel Excel Excel
Tiers of Management Receiving Variable Compensation Payments X X X X X

9
BENCHMARKING INFORMATION

Cost and Quality Information

Company Company Company Company Company
Attribute
X A B C D
Number of Commission Plans X X X X X
Complexity of Commission Plan (1: Not Complex…5:
X X X X X
Very Complex)
Monthly/ Monthly/ Monthly/ Monthly/ Monthly/
Frequency of Plan Update Quarterly/ Quarterly/ Quarterly/ Quarterly/ Quarterly/
Yearly Yearly Yearly Yearly Yearly
Sales/ Sales/ Sales/ Sales/ Sales/
Departments Involved in Plan Generation Finance/ Finance/ Finance/ Finance/ Finance/
HR HR HR HR HR
Average Number of Hours Spent Processing Variable
XX XX XX XX XX
Compensation Information (Per Month)
Average Number of Hours Spent on Analyzing
XX XX XX XX XX
Commission Information (Per Month)
Average Number of Hours Spent on Processing
XX XX XX XX XX
Exceptions (Per Month)
Performance Measures Tracked Within Variable
Yes/No Yes/No Yes/No Yes/No Yes/No
Compensation Process?
Approximate Variable Compensation Department
$XX $XX $XX $XX $XX
Processing Costs (Location Only)
Variable Compensation Costs as a Percentage of
X% X% X% X% X%
Revenue

10
ISSUES AND OBSERVATIONS SUMMARY
The following is a summary of the issues and observations noted during this review. Each issue/observation has been
prioritized based upon its business impact to Company X. For each issue, a page reference has been made to the
Detailed Issues & Observations section of this report which outlines the management implementation plan to address
each issue/observation. Each management implementation plan has been agreed upon by Company X management
and includes the responsible person and expected completion of each item.

Issues/Observations: The Commissions Plan Priority See Page

Plan Administration

Individual compensation plans are highly customized and change frequently. 12

The Mega-Deal clause in the Compensation Plan is not clearly defined. 13

Issues/Observations: The Commissions Process Priority See Page

Integrity of Bookings Data

The commission process is manual and prone to errors. 14

Relevant sales representative and geographical split information is not consistently included with
18
booking packages.
Commissions Department

Performance metrics are not used to improve the efficiency and effectiveness of the process. 18

Documented policies and procedures do not exist. 18

Goal letters are not properly authorized and maintained. 19

Priority: Low Medium High

11
DETAILED ISSUES AND OBSERVATIONS: THE PLAN

Responsible
Issues/Observations Management Implementation Plan
Party
1) Plan Changes: Individual compensation plans are highly • Consider limiting compensation rate (Name)
customized and change frequently. changes to quarterly. Consider effecting
rate changes prospectively rather than
Each sales representative has a goal letter with a base salary, quota
retrospectively.
and variable commission rates. Variable commission rates are
determined by the sales manager, taking into account sales territory • Consider establishing general rates based
and customer specifics. As a result, each sales representative on demographic categories.
commission rate is unique. Unique compensation rates allow
• Ensure that current, signed goal letters are
flexibility in motivating employees but can also result in large
in place.
amounts of manual intervention in the calculation process.
• Hold sales personnel accountable for not
Compensation plans are not reviewed and updated on a scheduled
having goal letters completed and on file in
basis. Instead, plans are adjusted “as needed.” As a result, multiple
a timely manner.
compensation plan revisions may be generated at any point in time.
In Q2 ‘XX, XX total compensation revisions occurred for XX total
sales reps. XX revisions were for sales support personnel, and the
remaining XX revisions were submitted for approximately XX sales
representatives. In Q3, as of (Month), XX plan revisions have been
submitted for sales representatives. Per sr. finance manger in
worldwide sales finance, an average of X to X plan revisions for
FYXX have been processed for each sales representative.
Business Impact: Increased processing costs (Company X’s
processing costs are XX times the benchmarked average, see p.
10); risk of incorrect payout; potential litigation by employees.

12
DETAILED ISSUES AND OBSERVATIONS: THE PLAN

Responsible
Issues/Observations Management Implementation Plan
Party
2) Mega-Deals: The Mega-Deal clause in the Compensation Plan • Ensure that the Mega-Deal clause in the (Name)
is not clearly defined. Compensation Plan is clearly worded.
Bookings that exceed $XXX are termed Mega-Deals. • Minimize legal loopholes by standardizing
Mega-Deal commissions payouts.
An average of XX Mega-Deals per year are completed. Mega-Deals
do not follow documented plan rates but are somewhat subjective • Clearly communicate the Mega-Deal
and are not always clear to the commissions department or the definition and payout criteria to sales
employee. Additionally, Mega-Deal commissions payout amounts personnel.
and payout timing varies from one instance to another. Subjectivity
• Involve legal in the annual sales
and lack of a clear definition within the Compensation Plan has
compensation design and wording.
motivated some sales representatives to threaten legal action. At
least one lawsuit has been filed against Company X related to Mega- • Store Mega-Deal information in a central
Deal clause interpretation. The legal department was not involved and secure location.
with the wording of Mega-Deal commission clause in the current
Sales Compensation Plan.
In addition, a centralized location for Mega-Deal information and
history does not exist.
Business Impact: Legal action filed by sales representatives;
increased time and cost to analyze and administer commissions for
Mega-Deals.

13
DETAILED ISSUES AND OBSERVATIONS: THE
PROCESS
Responsible
Issues/Observations Management Implementation Plan
Party
3) Manual Processing: The commission process is manual and • Track errors by booking administrator and (Name)
prone to errors. set goals for improvement. Provide
incentives for low error rates and penalties
A large number of manual adjustments are required to accurately
for high error rates.
calculate sales commissions due to the following factors:
• Consider changes in the commission plan
The plan design and plan administration is not designed to
that would enable increased automation in
achieve efficient processing of commissions payments.
the commission calculation process.
• Calculations (e.g., over-achievements, overlays/splits, de-
• Consider linking PeopleSoft to SAP to
bookings, removal of expenses for service bookings, exception
ensure that orders are booked with
bookings and Mega-Deals) must be performed manually and
appropriate sales representative and
entered into the system.
geographical split information. Ensure that
• The plan is designed to double compensate Company X sales a (Location) Account owner exists to verify
representatives for PSD orders obtained by PSD sales that PeopleSoft and SAP data agrees.
representatives. PSD information is transmitted on a system that
• Determine how PSD sales will be included
is not integrated with SAP, causing highly manual and inefficient
in future plan structures, taking into
processing.
consideration the amount of commissions
• Management makes many decisions to pay commissions paid on PSD sales and the time required
differently than indicated by the bookings data in the system. to process the commissions (i.e.,
Processing these exceptions is highly manual and inefficient. determine if there will be an overlay for
PSD sales or if PSD sales will be excluded
• The commissions plan is silent with regard to the amount of time
from the plan).
sales representatives have to research their commissions
payments. Researching those issues by commissions analysts is
time consuming and inefficient.

14
DETAILED ISSUES AND OBSERVATIONS: THE
PROCESS
Responsible
Issues/Observations Management Implementation Plan
Party
3) Manual Processing (continued) See previous page
• Sales management makes side agreements with sales reps
about commissions that are not always communicated timely and
in writing to the commissions department (e.g., forgiven draws or
forgiven de-bookings). Reflecting these agreements after
commissions have already been calculated is highly manual and
inefficient.
• Administration of changes to the plan parameters is not done
effectively or timely. For example, goal letters change with such
frequency that it can be difficult to know which are the most
current. Goal letters are also usually applied retroactively instead
of prospectively. Updating the system and calculating retroactive
adjustments is labor intensive, highly manual and inefficient.
Commission Booking Errors
Commission booking errors occur when sales representative data is
entered into the system incorrectly or not at all. In order to calculate
commissions, all relevant sales representative information must be
included. From (Month) to (Month) (Year), errors detected by the
commission department totaled XX, an average of XX per month.
(See Issue #5). In addition, in a sample of XX bookings we tested,
XX or X% were booked on the last day of the month. A large volume
of last-minute bookings increases the likelihood of errors.

15
DETAILED ISSUES AND OBSERVATIONS: THE
PROCESS
Responsible
Issues/Observations Management Implementation Plan
Party
3) Manual Processing (continued) See previous page
Manual Adjustments
Manual adjustments can be defined as items from previous months
that went unnoticed, lacked complete documentation, or required
manual maintenance. These adjustments are in addition to typical
manual adjustments that are necessary due to system limitations. In
Q1 and Q2, manual adjustments totaled XX, an average of XX per
month.
Per the commissions manager, manual adjustments outside the
typical day-to-day manual calculations (bookings errors and manual
adjustments) can be roughly broken down as follows:
• Bookings Errors X%
• PSD X%
• Goal Letters X%
• Exception Bookings X%
• Other X%
Business Impact: Inefficient processing; Increased processing
costs; Employee morale; Increased likelihood of errors.

16
DETAILED ISSUES AND OBSERVATIONS: THE
PROCESS
Responsible
Issues/Observations Management Implementation Plan
Party
4) Incomplete Booking Packages: Relevant sales representative • Track completeness of bookings packages (Name)
and geographical split information is not consistently included by sales personnel and by order entry
with booking packages. personnel. Hold personnel accountable for
submitting incomplete bookings packages.
Sales representative information, such as name and territory, must
be manually entered into the system to ensure that commissions are • Ensure that managers submit territory
properly paid. Bookings packages, which are used by order listing changes in a timely manner. Hold
administration to book orders, do not consistently contain complete managers accountable for untimely
commissions information. As a result, missing sales representative communication of information.
information prevents calculation of commissions or causes a
• Ensure completeness of booking
calculation/payment of commissions to the incorrect sales
packages by sales finance prior to
representative. In addition, incomplete commissions information
forwarding to order management.
requires an investigation into each instance. From (Month) to
(Month) (Year), incomplete commissions information was detected
by the commissions department XX times (or an average of XX per
month).
Territory listings are updated weekly by field administration.
However, changes to territory listings are not consistently
communicated from the field representatives in a timely manner.
Bookings are entered lacking the necessary data fields to calculate
commissions. Missing data includes employee name, date, overlays
and splits, if any.
Business Impact: Increased processing costs; Increased likelihood
of errors; Inefficient processing.

17
DETAILED ISSUES AND OBSERVATIONS: THE
PROCESS
Responsible
Issues/Observations Management Implementation Plan
Party
5) Performance Metrics: Performance metrics are not used to • Track sales representative, account (Name)
improve the efficiency and effectiveness of the process. manager, and order administrator
performance to ensure issues are
Performance metrics are not used to measure the effectiveness or
identified and solved quickly.
efficiency of the commissions process. Commissions processing
data, such as number of bookings missing commission information, • Use performance metrics to set personal
is tracked but not consistently used to improve individual/department goals during performance reviews.
performance.
Business Impact: Lack of accountability; Difficulty in identifying root
causes of issues; Lack of improvement in performance.

6) Policies/Procedures: Documented policies and procedures • Draft and implement policies and (Name)
do not exist. procedures for the commissions process.
Work with sales, sales finance and HR to
Policies and procedures for the commissions calculation process are
ensure that policies and procedures are
not in place. The commissions department recently experienced
fair and accepted by all involved.
significant turnover. The complexity and large amount of manual
intervention in the process increases the likelihood of errors. In
addition, the commissions manager maintains a large amount of
undocumented knowledge about the process.
Business Impact: Loss of knowledge in the event of employee
turnover; Increased likelihood of calculation errors; Difficulty in
training new personnel; Difficulty in assessing accountability.

18
DETAILED ISSUES AND OBSERVATIONS: THE
PROCESS
Responsible
Issues/Observations Management Implementation Plan
Party
7) Goal Letters: Goal Letters are not properly authorized and • Ensure that all Goal Letters are signed (Name)
maintained. and forwarded to a central administrator in
a timely manner.
According to the Company X compensation plan, “No incentive
compensation payment will be made to anyone covered by this plan • Hold employees and managers
until a copy of the Goal Letter is signed by the plan participant and accountable for failing to turn in signed
received by human resources. ” Goal Letters specify the goal letters.
commissions rate, base salary and over-achievement rate. In
addition to the employee’s signature, the employee’s manager and
HR are on the authorization matrix. We tested XX employee files to
ensure that a current signed Goal Letter was filed. In X of X
instances (X%), the Goal Letter lacked some level of the signatures.
Additionally, ownership of Goal Letter maintenance is not clearly
defined. A central location for employee signed Goal Letters does
exist. However, the Goal Letters do not have all required signatures.
A central location for Goal Letters with all required signatures does
not exist.
Business Impact: Incorrect commission rate may be paid; Increase
in the likelihood of legal action.

19
APPENDIX A: LEADING PRACTICES SCORECARD

As part of this review, Company X’s practices were benchmarked against the “Leading Practices.” An evaluation of
Company X’s processes is noted in each instance. Leading Practices were evaluated as follows:
Good/World Class: “Best Practice” currently in use.
Moderate Use: Improvement possible in order to achieve “Best Practice” status.
Limited/Some Use: Improvement recommended to improve process efficiency/effectiveness.
Where possible, improvement can be made in the company’s best practice structure. Reference has been made to
the Detailed Issues and Observations, where management’s change implementation is described.

Issue
Best Practice Evaluation
Reference

Offer compensation plans that provide a stable base with variable linked to
performance.

Establish compensation plans that are equitable and competitive.

Develop compensation plans that support strategic goals.
Link top management's compensation to company performance.
Communicate any changes in compensation plans to employees. 3, 4

Ensure that company-wide incentive compensation plans are designed in a

consistent, straightforward manner to maximize attainment/results and minimize 1, 4, 5, 6, 7
administration.

Good/World Class Moderate Use Limited/Some Use

20
APPENDIX A: LEADING PRACTICES SCORECARD

Issue
Best Practice Evaluation
Reference

Establish an incentive compensation expense, accrual, forecast and budgeting

process.
Incorporate a review of adjustments to revenue (e.g., returns, bad debts) within
7
the commission calculation process.
Store compensation plans in a central and secure location. 5

Good/World Class Moderate Use Limited/Some Use

21
APPENDIX B: LEADING PRACTICES DETAIL

Best Practice Company X Practice Evaluation

1 Offer compensation plans that provide a stable base with Company X’s total compensation plan
variable linked to performance. consists of base salary, variable
commission and key selling initiatives.
Base-variable pay configuration allows a more reflective cost in terms
Sales representatives that exceed quarter
of revenue. It enhances productivity because employees are more
and annual goals receive over-
motivated to act according to company’s best interests. Management
achievements. Over-achievements
has control over pay distinction between individuals. The configuration
increase the commissions rate as sales
can filter out poor performers and allow better focus on great
exceed target quotas.
performers.
Business Benefit:
• Greater sense of ownership from employees
• Better retention and loyalty
• Higher motivation

2 Establish compensation plans that are equitable and Company X compensation plans are
competitive. equitable and competitive in the market.
Company X compares its compensation to
Competitive but equitable compensation packages attract, motivate
other industry competitors and current
and retain high-quality employees. Because the job market is a
market rates.
moving target, it is vital that compensation balances equity and
competitiveness while fostering the company's financial performance. Sales representative quotas will be
adjusted according to a geographic
Business Benefit:
territory, market, customer and other
• More motivated employees variables encountered.
• Better quality candidates for jobs Compensation plans have been adjusted
• Greater retention of high performers against the market rates on an ongoing
basis.

Good/World Class Moderate Use Limited/Some Use

22
APPENDIX B: LEADING PRACTICES DETAIL

Best Practice Company X Practice Evaluation

3 Develop compensation plans that support strategic goals. Sales representative quotas will be
adjusted according to a geographic
When employees share the company's vision, they also realize that
territory, market, customer, and other
they have the power to help the company achieve its goals and that
variables encountered. Quotas are
they will be rewarded for doing so. With this awareness, they can
adjusted to encourage sales
focus on the tasks that ensure the company's success. The ultimate
representatives to develop business in
goal is to motivate employees to build the company, and base-plus-
targeted areas.
variable pay provides a vital incentive.
Business Benefit:
• Clear connections between strategic goals and pay
• Better employee focus on how to meet objectives
• Stronger link between employee effort and reward

4 Link top management's compensation to company performance. Company X management designs

deferred compensation to support
Linking performance to compensation is even more crucial here
employee objectives. Company X hires
because it helps focus executives to the company’s goal. It is a more
outside directors to guarantee that
consistent way of running a company since tying company’s short-
compensation for top management is fair
term and long-term goals to employee’s performance, including top
and competitive. Top management
management, puts everyone on the same track. This practice also
compensation policies are reviewed at
promotes higher confidence in shareholders and investors.
least every two years to reflect changes in
Business Benefit: corporate goals, the economy and the
shifts in the marketplace. Stock ownership
• Greater incentives for executives to improve productivity
is not directly linked to performance
• More responsible corporate image presented to investors and incentives.
shareholders
• Increased sense of ownership and responsibility among executives

Good/World Class Moderate Use Limited/Some Use

23
APPENDIX B: LEADING PRACTICES DETAIL
Best Practice
5 Communicate any changes in compensation plans to employees.
Competitive but equitable compensation packages attract, motivate
and retain high-quality employees. Because the job market is a
moving target, it is vital that compensation balances equity and
competitiveness while fostering the company's financial performance.
Business Benefit:
• Better input during the switch to variable pay
• Earlier detection of possible trouble spots
• Better coordination of pay with performance
6 Establish compensation plans that are equitable and
competitive.
Develop an incentive compensation plan that is designed in a
straightforward manner. Form a team charter including the sales
team’s mission, goals, expectations and constraints.
Clarify the sales force’s roles and responsibilities.
Business Benefit:
• Clear, well-defined goals
• Clarification of sales force’s roles and responsibilities
• Clear direction on each salesperson’s purpose and expected
results
Good/World Class Moderate Use
24
Company X Practice Evaluation
Company X clearly presents and
communicates changes in the pay policy
to all employees. When Company X
See Issue #5
executives and sales management decide
to adjust target commission and/or quota,
commission rates will change accordingly.
Employees must sign their own Goal
Letters for the new compensation to be
effective.
However, we tested XX employee files for
authorized Goal Letters and found XX to
lack complete authorization.
Company X has different sales commission
plans for approximately XX commissionable
employees. The plans are reviewed and
See Issues #1,
approved by the sales commissions
management and executives as often as #4, #5, #6, #7
necessary. Although each compensation plan
is created by using basic formula: Target
Commission/Quota, commission rate will
change each time the variables are changed.
Variables could include territory, district, type
of customer and type of product. Because of
the growing and changing economy, XX Goal
Letters were issued in Q1 (Year), causing
extensive manual administrative entries by
sales commission analysts.
Limited/Some Use
APPENDIX B: LEADING PRACTICES DETAIL
Best Practice
7 Establish an incentive compensation expense, accrual, forecast
and budgeting process.
Create a compensation expense model to evaluate potential
compensation scenarios compared to budget.
Compare actual compensation expense to budgeted compensation
expense and determine reasons for discrepancies.
Business Benefit:
• Ensures reasonableness of compensation expenses and reduces
surprises when comparing budgets to actuals
8 Incorporate a review of adjustments to revenue (e.g., returns,
bad debts) within the commission calculation process.
Develop procedures or checklists to ensure that adjustments are
accurate and complete. Develop a system that integrates the
compliance and planning modules to calculate and communicate the
impact of all approved adjustments. Send adjustments approved by
management to the appropriate groups on a timely basis.
Business Benefit:
• Ensure that commission payments result from valid
sales/customers in good standing
Good/World Class Moderate Use
25
Company X Practice Evaluation
Senior financial analyst of (Location) sales
prepares the commissions budget
annually. On quarterly basis, the
commissions forecast model is used to
check against the actual compensation
expense. The variance is used to
determine and analyze the discrepancies.
Company X managers have the ability to
make discretionary adjustments to an
employee’s sales commission, along with See Issues #8
the sign-off from an executive. Sales
adjustments (returns, de-bookings, sales
that have not been booked by booking
administrator, etc.) are sent directly to the
commissions manager for manual input
into the master audit sheet and True
Comp, and used for commission
calculations.
No policies & procedures are in place for
sales commission adjustment entries.
Limited/Some Use
APPENDIX B: LEADING PRACTICES DETAIL
Best Practice
9 Store compensation plans in a central and secure location.
Store original compensation plans in employee personnel files in HR.
Maintain signed copies in a locked and secure location in finance
accessible only by a limited number of authorized personnel.
Business Benefit:
• Increased security of sensitive employee information
• Faster compiling of compensation plans
Good/World Class Moderate Use
26
Company X Practice Evaluation
Company X does not have a centralized
Goal Letter management system. Original
Goal Letters are created by the senior
See Issue #5
finance manager. Copies of Goal Letters
are distributed to the sales commission
department, where they are kept in a
folder. The senior finance manager
maintains the signed originals. HR does
not maintain copies of Goal Letters for
employees.
Limited/Some Use
APPENDIX C: PROCESS FLOWCHART – COMMISSION
CALCULATION PROCESS
Orders are booked into
the system
• Booking Administrators
book product and service
sales in SAP as they
receive the Booking
packages.
› Because many bookings
are recorded at the end of
Friday or at the last day of
the month, manual errors
are made and fields, such
as sales rep. name, are left
incomplete.
 Fields that must be
completed when booking
Service: Sales Rep. Name,
MS Specialist, DS
Specialist, and overlay
representative name.
 Fields that must be
completed when booking
Products: Sales Rep.
Name, overlay
representative for PSD&
SLD.
o Data system allows Booking
administrator to complete
sales and product bookings
with having “N/A” fields.
 Booking deadline has been
communicated to sales reps
: Saturday of the last week
for that month.
Company X Control Points In Place:
 Internal control point (manual)
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SAP booking
information uploaded
into Cornerstone
• Booking reports are
uploaded from SAP into
Cornerstone at the end of
each business day.
 Commission are re-
calculated and refreshed
every night, result of the
download.
 (Name) (Commission
Analyst) is responsible for
maintaining MS &DS
bookings
 (Name) (Commission
Analyst) is responsible for
maintaining overlay sales
reporting.
 (Name) is currently
maintaining overlay product
reporting.
 Commission Analyst prints
the Business Object
booking reports on daily
basis. Report lists customer
name, sales representative
name, booking type, end-
user location, booking date,
etc.
 Commission Analyst checks
for splits, overlays and if the
correct sales representative
is assigned to the correct
customer.
o Sales representative
information is not linked to
customer information in the
system.
 Internal control point (system based)
Commission rates are
updated to reflect
revised Goal Letters
• (Name) (Sr. Finance
Manager, Sales) receives
commission information,
reviews it and creates Goal
Letters. Goal Letters specify
sales staff base salary,
commission rate, location,
Assigned Account, KSI, and
OA.
 Goal Letter must be signed
by Sales Rep Manager,
Sales Rep, and HR.
 (Name) forwards copies of
Goal Letters to HR and
keeps the originals in
his/her files.
 (Name) forwards copies of
Goal Letters to Commission
Analysts.
 Commission Analysts adjust
Master Audit Sheet (an
Excel spreadsheet used to
calculate commissions) with
the new commission rate for
sales staff as needed.
o No Policies & Procedures
exist in order to change
base salary and/or
commission rate.
Company X Control Weaknesses:
o Internal control weakness
Booked sales accuracy
is manually reviewed
› Manual process of
subtracting expenses and
reversing them from
Business Objects to
calculate commissions.
› Commission Analysts
manually check for errors
within Business Objects
reports, such as: splitting of
accounts, customer name
and sales representative
listed for that customer,
number of sales
representatives for that
customer, etc.
 Commission Analysts are
able to detect incorrectly
assigned sales
representatives, or
unassigned sales
representatives to specific
customers. It is done by
comparing Business
Objects reports to a weekly
updated Customer list,
which lists assigned sales
representatives to each
project.
› Process inefficiency
Commission Analyst
corrects booking errors
• After manual checking for
errors, Commission
Analysts make appropriate
changes to the system.
 For errors discovered during
the current month,
Commission Analysts
contact Booking
Administrator requesting to
correct errors in SAP.
 For errors discovered in the
previous months,
Commission Analyst
accesses Oracle Form (an
internal database) and
makes manual entries to
reflect required changes.
Forms will feed the updated
information into Business
Objects instantly.
Commission Analysts
generate Master Audit
Sheet
 Master Audit Sheet is used to
help Commission Analysts to
keep track of commission rate
changes and to compare it to
TrueComp reporting.
› Sales Commission Manager
manually enters each sales
rep. commission data and over-
achievements and forwards
information to Commission
Analyst for entry into Master
Audit Sheet.
 Master Audit sheet, with up to
date commission rates for
sales reps. calculates
commission and OA due.
 Commission rates have been
known to change anywhere
between X-X times per year
per each sales staff. The Goal
Letters with the latest rates are
received Senior Finance
Manager.
 Master Audit Sheet
commission calculations are
matched against TrueComp
reporting for accuracy.
 Payroll receives information
and issues checks based on
True Comp reporting.
 Payroll emails the list of all
commissions paid to Sales
Commission Manager.
 Payroll Pro Business interfaces
with HR People Soft to update
employee information.
BENCHMARKING INFORMATION
The following matrix documents the internal control testing performed relating to the incentive compensation
processes. Overall, opportunities exist to improve the processes within this function. These improvements will ensure
that internal controls are operating effectively and efficiently in order to mitigate risks associated with the incentive
compensation activities.
Test Attribute Applicable Exceptions % Comments/ Detail

Verify that the Goal Letter is signed by the plan Goal Letters are often signed only by the plan
Goal Letter XX XX X%
participant and manager. participant without management approval.

Identify the design services, methodology and X participants’ rates in the master audit sheet
Goal Letter product commission rate and verify that they agree XX XX X% were X% higher than the rates in the Goal
with rates used in the master audit sheet. Letter. Cause: rounding error.

Verify that the Goal Letter covers the time period

Goal Letter when sales were booked and the plan participant’s XX XX X%
commissions paid.

Separate product, design and methodology

services from each other and calculate commission X Participant’s rates were slightly different.
Bookings XX XX X%
due by using commission rates for the booking time Cause: rounding error.
period.

The deadline for bookings is the first Saturday

Identify sales that were booked on the last day of after the last day of the month. By booking
Bookings XX XX X%
bookings for the month. sales close to deadline, manual errors or
incomplete information is entered.

Understand and identify overachievement (OA)

Of the X overachievements tested and
opportunity rates. Calculate the OA rate and verify
Bookings XX XX X% calculated, only rounding differences were
that it agrees with the master audit sheet
found.
calculations.

Per the commissions manager, manual

adjustments outside the typical day-to-day
manual calculations can be roughly broken
Identify the volume of manual adjustments and down as follows:
Commissions understand the reasoning behind it. Time frame N/A XX N/A Bookings Errors - X%
tested: Q1 - Q2 (Year). PSD - X%
Goal Letters - X%
Exception Bookings - X%
Other - X%

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ACKNOWLEDGEMENTS
We would like to thank all Company X employees who assisted us in our work during this project. We received input
and assistance from the following people:

Corporate Controller (Name)

Director of Revenue Recognition (Name)
Sales Commission Manager (Name)
Sr. Finance Manager (Name)
Group Director, HR (Name)
Commission Analyst (Name)
Commission Analyst (Name)
Senior Commission Analyst (Name)
Director of Order Management (Name)
Litigation Paralegal (Name)
Senior Financial Analyst of (Location) Sales (Name)

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