Negative sales targets and percentage commissions

A while ago, I received an email from a distraught salesman. He believed his sales commissions were wrongly calculated, and asked me to shed some light.

Note that I’m not using the exact numbers he gave in his email.

The story goes that Michael (as I’ll call him) and his colleagues were given sales targets that were negative. How could sales targets be negative? Shouldn’t you be trying to sell something? The reason given was that the current economy was disastrous, and basically each sales person was trying to not lose sales.

You’re gonna bleed. It’s how much you bled.

Anyway, given Michael’s negative sales target, he managed to exceed it. He didn’t manage to bring in sales (positive sales numbers), but he didn’t lose too much money (slight negative sales numbers). But his sales commissions didn’t reflect that.

Now I’m not going to discuss how that works out. I can’t presume to understand the business logic behind the sales commission in this case, but I’ll discuss the mathematics behind the numbers.

The normal sales targets and commission

Let’s say your sales target for this month is $1000. This means you’re expected to sell about $1000 worth of products or services. We’ll ignore the condition that you will get some commission based on what you sell, regardless of how much you sold (my brother’s a sales person), as well as other types of commissions.

Let’s say the sales commission is based on how much extra you sold beyond your sales target. Makes sense, right? Let’s use simple percentages.

If you sold $1100 worth of products or services, then your percentage commission might be calculated as follows:
(Difference between Your Sales and Your Sales Target) / (Your Sales Target)

Or ($1100 – $1000) / ($1000) = 10% commission.

This is assuming that your sales amount exceeded the sales target, of course.

The case of negative sales targets

Now if the sales target is negative, as in Michael’s case, the mathematical formula still applies. But you have to note the negative sign. For some reason, “business” people (no offense to business people) tend to see -4567 as larger than 12, even though 12 > -4567. They see the magnitude first, not the value itself. (It’s also why I get emails about calculations involving negative numbers… anyway…)

Let’s say the sales target is -$1000. Everyone’s expected to lose money, but you try not to lose more than $1000. At least that’s what I’m interpreting it as.

Let’s say Michael managed to lose only $50. Or -$50 to be clear. The formula
(Difference between Your Sales and Your Sales Target) / (Your Sales Target)

have to be modified to this
(Difference between Your Sales and Your Sales Target) / (Magnitude of Your Sales Target)

In maths and programming terms, the “magnitude” part refers to the absolute function. Meaning you ignore any negative signs. Actually, the modified version works for the normal case too (which is why you should use it for the normal version anyway to take care of weird cases like this but I digress…).

So, we get (-$50 – [-$1000]) / abs(-$1000) = $950 / $1000
= 95%

Actually, you should use this:
abs( [Your Sales] – [Your Sales Target] ) / abs(Your Sales Target)

That’s the “foolproof” version. Consider it a bonus for reading this far. Frankly speaking, any competent programmer should be able to come up with that formula, even without much maths background. You just need to think about the situation a little carefully (ask “what if?” more often).

Michael’s calculated commission

When Michael wrote to me, he said his commission was calculated as follows (given that he only lost $50):
-$50 / -$1000 = 5%

Let’s say someone else lost -$900 that month. With the above calculation, that person gets:
-$900 / -$1000 = 90%

Clearly it makes more sense to lose more money! This was why Michael wrote to me.

I don’t propose the method I gave is correct, business-logic-wise. Michael didn’t give me any details on what he’s selling, or what his company is (or even why it’s acceptable to have negative sales targets, regardless of the economy). So I cannot give any help other than from a pure mathematical point of view. But I hope it’ll at least give Michael a fairer commission amount.

Questions

Given Michael’s situation, what do you think is an appropriate calculation formula?

Can you think of (or know of) a realistic situation where a negative sales target is acceptable? I say “acceptable”, but seriously, no company should “accept” that they lose money every month.

  1. John

    This is an interesting problem. Although doing business is to earn +ve profit but in a case that a business starts as a greenfield, management expect the first few years will be losing money due to capital investment in initial stage.

    I would have this view to look at Mike’s problem. If he lost -$1,000, he met target should have got the 100% target. Any lose less than -1,000 (say from -999 to 0) should be treated as >100% achievement. From -1,000 to -50, Mike actually earned +950. So 950 is 95% of the magnitude of 1,000 base. However, since it is better than target, I suggest to add 1 to the answer and this meant Mike is 195% of target. Or he earned 95%.

    Similarly, his colleague who achieved -900 actually earned +100 for the company (from -1000 to -900). So his colleague was 100/1,000 = 10%. So his colleague achieved 110% of target, less than Mike.

    What do you think?

  2. Vincent

    Hi John, I can understand the newly created business part. As a new business, sales can be expected to fluctuate wildly, even to the point where the business is losing money initially.

    As for the sales commission calculation… Negative numbers can be tricky to deal with, particularly in a financial calculation. In the normal case, there’s actually another number that’s not spoken, which is the base for calculation. This unspoken base number is $0.

    In the negative numbers case, there’s no unspoken base number. Let’s say we set the base number as -$1500, with sales target -$1000, and the sales number is -$100. According to your calculation method (and mine in the article), the sales commission will be 90%.

    What if we slide the numbers? We add $1500 to (-$1500, -$1000, -$100) to become (0, $500, $1400). If we calculate the sales commission on that, we get 1400/500 * 100% = 280%

    This is why the solution depends on the context of the problem, and a simple calculation method is probably not suitable.

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