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Be able to prove good faith in commission calculations

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If you use a written commission compensation plan as part of your incentive-pay program, make sure you do two things:

  1. Specify in the plan who makes the final decisions on when and how much commission is due.
  2. Be prepared to show that the manager who is making the commission determination did so in “good faith.”

If you fail to meet those two steps, a court could second-guess your commission calculations.

Recent case: Philips Electronics paid sales rep Dennis O’Toole commissions on his sales, and it calculated them according to a written compensation plan. Two company vice presidents were authorized to make the final decision on whether sales reps were due commissions and the amount.

When Philips fired O’Toole, he sued for alleged unpaid commissions. Philips said it had followed the plan and made the final decision. But O’Toole obtained testimony from another manager, who said O’Toole had “a clear-cut case” and was entitled to commissions under the plan.

That was enough for the court to order a trial. Now Philips will have to show it made the decision in good faith. (O’Toole v. Philips Electronics, et al., No. 04-1730, DC NJ, 2006)  

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